U.S. Small Business Optimism Weakens Again As Hiring Intentions Remain Depressed

Times may be improving, but small business' sense of that has sagged of late. The National Federation of Independent Business (NFIB) indicated that for the second consecutive month small business optimism slipped. The July decline from June to an index level of 86.5 was to the lowest level since March. Moreover, the latest figure was down slightly from last year though it remained well improved from the lows of this past winter.

During the last ten years, there has been a 49% correlation between the level of the NFIB index and the two-quarter change in real GDP.

The percentage planning to raise employment remained slightly negative and the percentage with one or more job openings slipped to just 9%, nearly the lowest since 1982. During the last ten years there has been a 71% correlation between the NFIB employment percentage and the y/y change in nonfarm payrolls.

Driving the cautious hiring was the falling percentage of small businesses expecting the economy to improve, back to its lowest level since March. The percentage expecting credit conditions to ease also remained in its recent range while the percentage reporting that now is a good time to expand business held in its modestly positive range of recent months.

During the next 3-6 months, plans for capital spending also remained range-bound but modestly positive. This weakness in investment reflects not only diminished optimism about the economic outlook but poor profits. Forty-five percent of firms are reporting lower earnings this quarter versus last.

The largest, single most important problems seen by business were poor sales (32%), taxes (22%), government requirements (12%), insurance cost & availability (9%), competition from large businesses (5%) and inflation (3%).

The percentage of firms planning to raise prices held at 5% and that was near the record low. The percentage of firms actually raising prices slipped and remained in negative territory, near the record low. During the last ten years there has been a 69% correlation between the y/y change in the producer price index and the level of the NFIB price index.

About 24 million small businesses exist in the United States. Small business creates 80% of all new jobs in America and the NFIB figures can be found in Haver's SURVEYS database.

Why Are Banks Holding So Many Excess Reserves? from the Federal Reserve Bank of New York can be found here.

Japan paradox - The paradox of Japan’s consumer confidence is that the index is over the 50 percent mark of its range. It also stands right at its average level of readings going back to 1988. Even so this is a diffusion index with 50 as the theoretical point of neutrality. At a level of 39.4 we are instead at the average reading and at the mid-point of the range of values of consumer confidence readings going back about 20 years.

An unexpected standard - Since the economy usually is expanding, we would expect the average of a figure like consumer confidence to be above 50. But Japan has had some hard times during this period including its so-called lost decade. As for the index range we can’t be a so sure of its values or middle but a value near 50 also seems likely. The readings on Japan confidence do not conform to reasonable expectations. So instead so looking at this a diffusion index with 50 as neutral we should look at it with its man value set as neutral. In July 2009 the index stands at its mean reading –a mean reading based on about 20-years of observations. Adjusted for its own mean, therefore Japan’s confidence level has gotten to zero.

A better interpretation - Based on the plot of past values it looks like Japan’s consumers are a relatively content when the index resides between values of 50 and 45 on this index. So while the index reading is back to its long term average that is not yet a good enough spot. For now with some rise in machinery orders in hand it looks like Japan’s economy is getting back on something more like an even keel. Consumer prices are still falling so it’s too soon to say that Japan is out of the woods. In last month’s report Japan was the last large OECD economy still giving off negative readings on the OECD leading indicators series. But seeing some firmness in consumer confidence does give us some reason to take heart. Japan may be on the verge of turning the corner to better times.

The Baltic States, Latvia, Lithuania and Estonia have begun to repair their current accounts deficits which had reached as high as 18-28% of GDP . The first chart shows the current accounts as a percent of GDP for the three countries.

Today Latvia and Lithuania released balance of payments data for June. Both countries show a continuation of the current account surplus that started in February of this year, as shown in the second chart. In Latvia, it has been the surplus on income that has accounted for much of the current account surplus. However, there has also been a declining deficit on goods and services and finally a surplus in June. The balance on current transfers has been small and has had little effect on the overall current balance. The third chart shows the trends in the income and goods and services balances for Latvia.

In Lithuania, the trends are less clear. The income balance only turned positive in June and the balance on goods and services remains in deficit. However, in contrast to Latvia, current transfers have been the major factor accounting for the surplus on current account, as can be seen in the fourth chart.