Small Business Optimism Retreats
Today the NFIB (National Federation of Independent Business) data for January were released. Late last year, the small business optimism index climbed above the 100 level for the first time in eight years. However, this still compared quite unfavorably with what used to be the norm in recoveries during the “normal” bubble era prior to the 2008 crisis.
In January, the gauge fell by a rather pronounced 2.5 points to 97.9. The reasons for this decline are summarized in a Reuters report:
“The National Federation of Independent Business said on Tuesday its Small Business Optimism Index fell 2.5 points to 97.9 last month, reversing December’s gains, which had taken the index over the 100 threshold for the first time in eight years.
It was held back by a plunge in expectations for the next six months as well as pessimism over sales and earnings. Businesses were also less enthusiastic about increasing inventories, undertaking capital investment projects and expansion plans. Still, they retained an upbeat view of the jobs market.
“Job creation is the core of growth and the small business sector appears to have shifted to second gear,” the NFIB said. Employment growth is accelerating, with government data last Friday showing the economy added more than a million jobs over the past three months, a feat last achieved in late 1997.
The increase in the number of people receiving a paycheck, combined with the stimulus from lower gasoline prices, should boost consumer spending and blunt the blow on the economy from weaker exports and business investment.
Softening global demand is weighing on U.S. exports, while lower crude oil prices have forced businesses to curtail capital expenditure projects. These factors combined to hold back the economy to a 2.6 percent annual growth pace in the fourth quarter.
The NFIB survey found that although capital spending plans fell in January, they remained near cycle highs, as did actual capital spending.
In short, the report was a mixed bag. We would however note that employment is a lagging economic indicator. Contrary to what is implied above, employment does not “produce” economic growth, but is the result of economic growth. It remains to be seen to what extent the boost to personal incomes from lower energy prices can really offset the curtailment of capital expenditure and the coming wave of liquidation of malinvested capital in the oil patch, given the overwhelming contribution to US economic growth provided by this bubble sector in recent years.
We continue to believe that the likely sequence of events is that the negative effects will be felt first, and the positive ones only later. We are not convinced that the widely expected increase in discretionary consumer spending is a sure thing. Many consumers still need to deleverage after the debt binge of the bubble era, and any improvement in incomes due to lower energy costs may well be devoted to this purpose.
A seemingly positive aspect of the report is that planned and actual capital spending in the small business sector remains near cycle highs. However, even this factor must be viewed with a certain degree of apprehension, since much of current capital spending is undertaken in an environment of relative prices that have been vastly distorted by the Fed’s monetary pumping. Much of it is therefore likely to eventually be revealed as capital malinvestment.
The Death of Entrepreneurship
In addition, there are more businesses dying than are created in the US economy since 2008, so the information provided by NIFB comes from a shrinking base (and this smaller base will be decimated further in the next downturn). Below are two charts from Gallup illustrating this situation.
Note that this development is a historic first: according to the Census Bureau, the total number of new business start-ups and business closures per year have crossed in 2008 for the first time since measurements began. Since then, 70,000 more companies are closing down on average than are founded every year (compared to 100,000 net new business formations on average previously). The plunge in net new business formation certainly belies the stock market’s exuberance.
Net new business formation turns negative – a line that has been crossed in 2008 for the first time ever.
The crash in net new business formation belies the stock market’s funny money-induced exuberance.
Obviously, this decline in entrepreneurship is quite worrisome and in our opinion indicative of the phony nature of the echo bubble created by the Fed’s massive money printing since the 2008 crisis. And it was indeed massive: As of the end of December 2014, the US broad true money supply TMS-2 has more than doubled from the level it inhabited in early 2008. The economic distortions this has caused will only be fully appreciated once the inevitable bust strikes. Given the extent of monetary pumping over the past six years, it seems likely though that it will turn out to be the mother of all busts.
The effects of the decline in business formation are perhaps still too small to be truly felt in the bigger scheme of things. However, we note that annual federal deficits in the $700 billion range are these days celebrated as great feats of fiscal rectitude. A mere decade ago such deficits would have been regarded as extremely alarming. It seems possible that the dearth of business formation is already impinging on tax revenues.
This means that a great many things will become unaffordable a lot faster than was hitherto assumed. For instance, the State’s so-called “unfunded liabilities”, a problem that up until recently was always thought to be a temporally distant one of no great concern to the present (apart from exercising a handful of professional worrywarts), may be coming home to roost much earlier than expected.
The NFIB index largely reflects cyclical trends, but it has moved into a new, lower range, that is telling us that the post 2008 economy continues to be vastly different from what has been considered the normal state of affairs previously. This is further confirmed by the fact that net new businesses formation has turned negative in the past several years.
We see all of this as additional evidence that the the 2008 crisis has inflicted a severe blow on a fundamental level on the post 1971 debt money system. The vertiginous advance in stock prices and junk bond prices since 2009 has merely been masking this fact. The system keeps limping along with the generous application of central bank printing presses all over the world, but a close look reveals that a sizable amount of structural damage remains in place.
Given that policymakers know of only two strategies whenever a bust strikes (namely deficit spending and money printing), even more damage stands to be inflicted as time goes on. Eventually there will be a problem so big, it will be impossible to “fix” it again in this manner. We know from experience that politicians, bureaucrats and the mainstream media will be quick to blame the market economy when something untoward happens on the economic front. Don’t be taken in: in reality, misguided central economic planning is at the root of all the disturbing trends discussed above.
Charts by: SentimenTrader, St. Louis Federal Reserve Research, Gallup