Small Business Optimism Continued Lower

Small business optimism in June fell another 1.8%, according to the National Federation of Independent Business (NFIB). It was the fourth m/m decline this year.

During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.

Respondents expecting the economy to improve rose slightly m/m but remained near the lowest level since early 2001.

The percentage of firms planning to increase employment slipped back to the lowest level since 2003. The number of firms currently with one or more job openings remained stable but off from the April high. During the last ten years there has been a 72% correlation between the NFIB percentage and the y/y change in nonfarm payrolls.

The percent planning to raise capital expenditures fell moderately to a new low (27%) since 2003..The percentage of firms planning to raise average selling prices slipped to 29%. The percentage of firms actually raising prices also fell m/m to 23% but remained up versus a 22% average last year. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.

About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.

The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

The leading indicator of chain store sales from ICSC-UBS rose 0.4% (-2.1% y/y) following two consecutive weeks of 0.3% decline.

Consumer sentiment among Japanese households with two or more persons declined to 47.2 from 49.8 in May according to the Cabinet Office's diffusion index. The decline was greater than expected and resulted in the lowest value of the index so far this year. To illustrate the weakening of consumer confidence, we have plotted the index of consumer confidence and its year over year increase in the first chart. (Since the monthly data are available only from Jan 2004, there are only two and a half years of data.) The year over year percentage change in the diffusion index is an indicator of the trend in the diffusion index. In recent months the year over year percentage change has declined from a peak of almost 6% in March to 1.3% in June. The erosion of consumer confidence contrasts with strengthening of confidence in the business community. (See the commentary by Carol Stone on July 3rd, reporting on the June Tankan Survey.)

In spite of the recent trend, sentiment among Japanese consumers has improved over the period of the survey. The biggest improvement is seen in consumers' attitude toward employment prospects. The index for this component has risen to 51.7 in June, 2000 from 45.6 in June, 2004. The other components--Overall Livelihood and Income Growth have shown more moderate gains but the Willingness to Buy component, while slightly above June 2004, is at 48.8, almost a full point below the 49.7 of June 2005.

Price expectations of consumers in all Households in June show substantial increases in the numbers expecting prices to rise. 23.5% expect prices to rise between 2 and 5% in the next year, almost double the percent that expected such increases in June, 2004. Current price expectations are shown in the following table compared with those for June 2005 and 2004. As an indication of the shift in consumers' concern from one of deflation to one of inflation, we show, in the second chard, the decline in the percent of consumers expecting prices to stay the same or decline by two percent with the rise of those consumers expecting price to rise by less than two percent.