Tag Archives: NFIB

NFIB Survey Trips Economic Alarms

Last week, I wrote an article discussing the August employment report, which clearly showed a slowdown in employment activity and an overall deterioration the trend of the data. To wit:

“While the recent employment report was slightly below expectations, the annual rate of growth is slowing at a faster pace. Therefore, by applying a 3-month average of the seasonally-adjusted employment report, we see the slowdown more clearly.”

I want to follow that report up with analysis from the latest National Federation of Independent Businesses monthly Small Business Survey. While the mainstream media overlooks this data, it really shouldn’t be.

There are 28.8 million small businesses in the United States, according to the U.S. Small Business Administration, and they have 56.8 million employees. Small businesses (defined as businesses with fewer than 500 employees) account for 99.7% of all business in the U.S. The chart below shows the breakdown of firms and employment from the 2016 Census Bureau Data.

Simply, it is small businesses that drive the economy, employment, and wages. Therefore, what the NFIB says is extremely relevant to what is happening in the actual economy versus the headline economic data from Government sources.

In August, the survey declined 1.6 points to 103.1. While that may not sound like much, it is where the deterioration occurred that is most important.

As I discussed previously, when the index hit its record high:

Record levels of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle.” 

That point of “exuberance” was the peak.

It is also important to note that small business confidence is highly correlated to changes in, not surprisingly, small-capitalization stocks.

The stock market, and the NFIB report, confirm risk is rising. As noted by the NFIB:

“The Uncertainty Index rose four points in August, suggesting that small business owners are reluctant to make major spending commitments.”

Before we dig into the details, let me remind you this is a “sentiment” based survey. This is a crucial concept to understand.

“Planning” to do something is a far different factor than actually “doing” it.

For example, the survey stated that 28% of business owners are “planning” capital outlays in the next few months. That’s sounds very positive until you look at the trend which has been negative. In other words, “plans” can change very quickly.

This is especially the case when you compare their “plans” to the outlook for economic growth.

The “Trump” boom appears to have run its course.

This has significant implications to the economy since “business investment” is an important component of the GDP calculation. Small business “plans” to make capital expenditures, which drives economic growth, has a high correlation with Real Gross Private Investment.

As I stated above, “expectations” are very fragile. The “uncertainty” arising from the ongoing trade war is weighing heavily on that previous exuberance.

If small businesses were convinced that the economy was “actually” improving over the longer term, they would be increasing capital expenditure plans rather than contracting their plans. The linkage between the economic outlook and CapEx plans is confirmation that business owners are concerned about committing capital in an uncertain environment.

In other words, they may “say” they are hopeful about the “economy,” they are just unwilling to ‘bet’ their capital on it.

This is easy to see when you compare business owner’s economic outlook as compared to economic growth. Not surprisingly, there is a high correlation between the two given the fact that business owners are the “boots on the ground” for the economy. Importantly, their current outlook does not support the ideas of stronger economic growth into the end of the year.

Of course, the Federal Reserve has been NO help in instilling confidence in small business owners to deploy capital into the economy. As NFIB’s Chief Economist Bill Dunkleberg stated:

“They are also quite unsure that cutting interest rates now will help the Federal Reserve to get more inflation or spur spending. On Main Street, inflation pressures are very low. Spending and hiring are strong, but a quarter-point reduction will not spur more borrowing and spending, especially when expectations for business conditions and sales are falling because of all the news about the coming recession. Cheap money is nice but not if there are fewer opportunities to invest it profitably.”

Fantasy Vs. Reality

The gap between those employers expecting to increase employment versus those that did has been widening. Currently, hiring has fallen back to the lower end of the range and contrasts the stats produced by the BLS showing large month gains every month in employment data. While those “expectations” should be “leading” actions, this has not been the case.

The divergence between expectations and reality can also be seen in actual sales versus expectations of increased sales. Employers do not hire just for the sake of hiring. Employees are one of the highest costs associated with any enterprise. Therefore, hiring takes place when there is an expectation of an increase in demand for a company’s product or services. 

This is also one of the great dichotomies the economic commentary which suggests retail consumption is “strong.” While business remain optimistic at the moment, actual weakness in retail sales is continuing to erode that exuberance.

Lastly, despite hopes of continued debt-driven consumption, business owners are still faced with actual sales that are at levels more normally associated with the onset of a recession.

With small business optimism waning currently, combined with many broader economic measures, it suggests the risk of a recession has risen in recent months.

Customers Are Cash Constrained

As I discussed previously, the gap between incomes and the cost of living is once again being filled by debt.

Record levels of consumer debt is a problem. There is simply a limit to how much “debt” each household can carry even at historically low interest rates. In turn, business owners remain on the defensive, reacting to increases in demand caused by population growth rather than building in anticipation of stronger economic activity. 

What this suggests is an inability for the current economy to gain traction as it takes increasing levels of debt just to sustain current levels of economic growth. However, that rate of growth is on the decline which we can see clearly in the RIA Economic Output Composite Index (EOCI). 

All of these surveys (both soft and hard data) are blended into one composite index which, when compared to GDP and LEI, has provided strong indications of turning points in economic activity. (See construction here)

As shown, the slowdown in economic activity has been broad enough to turn this very complex indicator lower.

No Recession In Sight

When you compare this data with last week’s employment data report, it is clear that “recession” risks are rising. One of the best leading indicators of a recession are “labor costs,” which as discussed in the report on “Cost & Consequences Of $15/hr Wages” is the highest cost to any business.

When those costs become onerous, businesses raise prices, consumers stop buying, and a recession sets in. So, what does this chart tell you?

Don’t ignore the data.

Today, we once again see many of the early warnings. If you have been paying attention to the trend of the economic data, and the yield curve, the warnings are becoming more pronounced.

In 2007, the market warned of a recession 14-months in advance of the recognition. 

Today, you may not have as long as the economy is running at one-half the rate of growth.

However, there are three lessons to be learned from this analysis:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

We do know, with absolute certainty, this cycle will end.

“Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, cannot be repealed.” 

Being optimistic about the economy and the markets currently is far more entertaining than doom and gloom. However, it is the honest assessment of the data, along with the underlying trends, which are useful in protecting one’s wealth longer-term.

3 Things: Fed Problem, Oil – Ain’t 2009, NFIB Un-Optimism

“3 Things” is a weekly post of thoughts I am pondering, usually contrarian, with respect to the markets, economy or portfolio management. Comments and thoughts are always welcome via email,  Twitter, and/or Facebook.

The Fed’s Got A Problem

The most recent employment report sent the financial market pundits abuzz claiming that the economy was on solid footing with no recession in sight. The problem, for anyone willing to actually look at the data, was the underlying data was mostly disappointing.

While the BLS trumpeted 242,000 new jobs in February, wages declined 0.1% and the average workweek fell by 0.2 hours along with aggregate hours worked falling a hefty 0.4%. Furthermore, part-time work soared in February while full-time job growth was mediocre.

But even stranger was that out of the 242,000 jobs, retailing saw a massive jump of 55,000 jobs. This is in a month when stores are not hiring a lot of part-time work to deal with a shopping season. Jeffrey Snider at Alhambra Partners picked up on this by pointing out the differential between actual retail sales and “hiring.”

Starting April 2015, overall retail sales (again, including auto sales) fell below 3% on a 6-month average basis (meaning more than a one-month drop in growth rate) – and have remained closer to 2% than even 3%. In past cycles, that has meant initiation of contraction in retail trade employment and widespread recession. Not this time, however, as the BLS gives us a remarkable +313k gain (including February 2016) over the last 11 months. That equates to an astounding 28.5k per month.”


Pretty amazing.  This is even more confounding when you look at the NFIB’s Small Business Survey which shows real retail sales and expectations of sales both on the decline.


But it is not just in “retail trade” that employment gains are an issue but rather throughout the entirety of the report. The obfuscation of the data is coming from the mathematical “seasonal adjustments” along with the “birth/death” adjustment which are adding jobs that aren’t actually there.

Think about it this way. If the unemployment rate were truly 4.9%, and jobs were actually being created at the fast clip since the 90’s, then labor force participation rates, along with wage growth, should be at similar levels. Right? Uhm....


Of course, the reason that labor force participation rates remain so low is that job creation has failed to exceed the growth rate of the working-age population. With the population growing faster than employment, the number of unemployed living in the shadows continues to swell.


Of course, herein lies the problem for the Federal Reserve, who remains intent on further rate hikes this year, which could lead to a major policy error. The Fed’s own Labor Market Conditions Index, which has now declined into contraction, also suggests that something is very wrong with the employment data over the last several months.


If the employment gains were indeed as strong as the Fed, and the BLS, currently suggest; the labor force participation rate should be rising strongly. This has been the case during every other period in history where employment growth increased. Since the financial crisis, despite employment gains, the labor force participation rate has continued to fall.

This suggests that at some point in the future, we will likely see negative revisions to the employment data showing weaker growth than currently thought. 

The issue for the Fed is by fully committing to hiking interest rates, and promoting the economic recovery meme, changing direction now would lead to a loss of confidence and a more dramatic swoon in the financial markets. Such an event would create the very recession they are trying to avoid.

Oil – This Ain’t 2009

I live in Houston where oil is literally the life-blood of the economy. My wife works in the oil field related sales, my friends work for oil companies as well as my clients who are working and saving for their retirement. I would love nothing more than oil prices to go much higher as it would make my life immeasurably simpler.

Over the last couple of weeks, the rally in oil has gotten the financial media and analysts all stirred up with predictions the “bottom in oil is in” and “$70/bbl oil is on its way by summer.” These views are based on the assumption that the decline in oil prices today is much like what we saw during the “dot.com bust” and during the “financial crisis.”

It’s not.

This morning Liz Ann Sonders from Schwab sent out the following tweet:

This misses the main problem with oil which is not going to be resolved anytime soon. The chart below shows the current supply of oil versus demand. Given that prices over the long-term are a reflection of the supply/demand dynamic, the current problem is quite apparent.


This supply/demand imbalance is not going to be resolved my a mild stabilization in supply but rather a rapid decline in production. However, such a swift decline can not feasibly occur due to the need by oil companies to generate income to continue operations, make debt payments, and generate a profit, albeit at much lower levels, for shareholders. As shown in the chart above, the oversupply of oil was eventually reversed but over a very long period of time.

When the supply/demand imbalance became inverted it paved the way for massive oil price rallies in 2005 and 2009 (highlighted circles in the chart below) as “peak oil” became the prevailing fear.


With oil supplies once again exceeding demand, particularly in a weak global economy, oil companies will once again have to balance reducing supply against maintaining operations and profitability. Therefore, we are once again in position for a long, slow, decline in supply which will lead to sustained lower trading ranges for oil prices. Consequently, this will lead to lower reported profit margins for energy companies for the foreseeable future.

The point here is simple: “This ain’t 2009.”  

Yes, there will terrific trading opportunities for energy-related companies in the future. But first we need to work through the shake out of marginal companies that will file for bankruptcy, consolidation of weaker but stable players and reversions of pipelines back into parent companies. These actions will likely keep action volatile in the sector for a while and there will be significant money lost on speculative bets that go bust.

None of this is a bad thing, it is just the consequence of excess being reverted to a healthier and strong state.

If only Central Bankers understood the same.

The NFIB’s Un-optimistic View

While the media continues to jump on every government skewed statistic to spin into a positive headline, a recent survey of “boots on the ground” companies suggest something else is going on in the economy.

The National Federation of Independent Business recently released their latest survey of small businesses for February. The results were less than optimistic as shown by the sharp decline in their overall outlook over the last couple of months.


As Bill Dunkleberg, Chief Economist for the NFIB, stated:

“Monthly management of monetary policy using data subject to substantial revision is inconsistent with the acknowledged lags in policy and not supportive of real growth which requires more policy consistency. Financial markets, of course, thrive on the variability such policies produce and support a zero-interest-rate policy (ZIRP).

Meanwhile, compared to 2009, consumer interest income is down cumulatively over $3 trillion dollars, an unhappy side effect of Fed policies. Low interest rates are great if they occur in an economy that presents investment opportunities. This happens when the economy is exhibiting solid growth which it has not done in this expansion. The 1983 expansion averaged 650,000 new jobs each quarter compared to 450,000 in this expansion with a labor force 30 percent larger.

NFIB data indicate slow growth in the first quarter following the 1 percent growth rate for the fourth quarter of 2015. The GDPNow forecast from the Atlanta Fed is about 2 percent and the NFIB data basically agree. Owners are very pessimistic about business conditions in the coming months and spending and hiring plans have softened.”

Despite the always optimistic view of the media and Wall Street, businesses that ACTUALLY OPERATE in the economy have a much different view. Not surprisingly, the correlation between NFIB expectations and economic growth are fairly correlated which suggest that the economy is likely weaker than headlines suggest. 


As shown above, the decline in actual and planned sales would also suggest weaker hiring. Not surprisingly, the number of firms increasing employment last quarter also declined which again brings into question the accuracy of recent employment reports. 


Of course, if things were as good economically as we are told by Wall Street and the mainstream media, would the ECB really be needing to drop further into negative interest rate territory and boost QE? 

Just some things to think about.

Lance Roberts


Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In