Small Businesses Start to Worry About Rates

Nov 14, 2023

In an earlier post, we discussed the latest small business survey from the NFIB. Another aspect of the survey is to question businesses on what is currently their most important problem.  As shown in the table below, by far the most common response is either cost or quality of labor accounting for a combined 32% of responses. That is despite the apparent slowdown in labor markets as we discussed in today’s Morning Lineup. Another 22% of responses point to government-related concerns like taxes (13%) and government red tape (9%). Combined, that is tied with inflation for the second most pressing issue among small businesses.

While it makes up a vastly smaller share of responses at only 5%, financial & interest rates have seen their share rise significantly.  At 5%, it is the highest reading since 2010.

Furthermore, of firms reporting a negative outlook for expansion, rates rank as the second most common reason for said outlook behind political climate. While political climate holds a higher share of responses, it is worth noting that the reading has historically held a strong correlation with which party is in office (tending to favor Republicans). As shown below, after the 2016 election when Trump was elected to office, the readings tanked whereas leading up to and in the wake of the 2020 election of President Biden the reading rose sharply. Since then it has moderated, but it still remains the main reason cited by small businesses for their negative outlook.

Finally, we would note that although the October report saw a massive drop off in actual sales, few businesses appear to be overwhelmingly concerned with the issue.  Only 5% of responses credited poor sales as their biggest problem. That is unchanged for five months in a row as it was higher as recently as the summer of 2021.

Small Business Sales Get Slammed

Nov 14, 2023

This morning’s release of small business sentiment from the NFIB showed optimism fell by less than expected, coming in at 90.7. That compares to 90.8 in September and leaves the index in the middle of the past several months’ range.  Although that is not at a new low, current levels are near the lowe end of the post-pandemic recession range.

Business outlook was unchanged at a historically low -43, albeit that is off the lows from June of last year. As small businesses remain pessimistic in their evaluation of the economy, there has been a significant deterioration in sales.  Although sales expectations have risen, observed sales changes are down to -17 which outside of April through July 2020 is the weakest reading since September 2010.  That has resulted in actual earnings changes also deteriorating with current levels very close to post-pandemic lows.  In terms of prices, the index of higher realized prices ticked up to 30.

When surveyed on the most important reason for lower expected earnings, the highest share of respondents reported increased costs as the culprit. Granted, that combines input costs with increases in other aspects like taxes and finances (i.e. interest rates). While moving higher, the share reporting increased costs as their biggest reason for lower earnings is still below levels from last fall.  On the other hand, the share reporting sales volumes as the reason has been rising steadily to levels not seen since May 2021.

In the table below, we show all categories of the report as well as their month-over-month change and how those readings rank as percentiles of all months in the survey’s history.  The headline number’s further decline, albeit marginal, still leaves it in the bottom decile of historical readings. The bulk of the drop was thanks to the deterioration in actual earnings changes, but otherwise, breadth wasn’t too bad for the index’s inputs.  That being said, the month-over-month drop in earnings changes does rank in the bottom 2% of all months on record, and other non-inputs to the headline number were more mixed. Again, actual sales changes were notably weak and, like actual earnings changes, recorded a historic month-over-month decile.  That also applied to credit conditions for regular borrowers as interest rates remain elevated.

CPI Reactions Slide

Nov 13, 2023

The economic data slate is light today to kick off the new week with the only US release of note being the New York Fed’s Survey of Consumer Expectations (which we will cover in tonight’s Closer), but tomorrow we’ll get the all-important CPI report for the month of October.  In the chart below, we show the daily change of the S&P 500 on each CPI release day going back to 2000.  As shown, it will be the one year anniversary of what is currently the record gain on a CPI day with the 5.54% jump last November when CPI came in weaker than expected, dramatically shifting Fed pricing.  S&P 500 reactions to CPI days have remained strong with an average daily gain of 0.30% on the last ten monthly CPI days, but that’s down quite a bit from higher readings seen this past summer.

Although last November marked an outlier of performance on CPI days, November is actually the worst month of the year for average S&P 500 daily moves on CPI days.  As shown below, ironically sandwiched between two of the best months, the average decline of 0.37% in November is the worst of any month. That is because not only does November hold the record gain in 2022, but the month also boasts the record loss on a CPI day with the 6.12% decline in 2008.  However, in terms of how actual results of CPI prints come in versus estimates, there does not appear to be any significant seasonal patterns.  Put differently, average gains on CPI days are likely a more nuanced function of the actual results of the report and market volatility of the time rather than seasonality.