As we noted in an earlier post, issues that businesses are reporting to be their biggest problems stayed mostly the same in November.  Of the ten problems that are surveyed, half were unchanged month over month. But those that did change give some interesting insights into the current status of the economy. For starters, as small businesses report that they have difficulty hiring (which we detailed in more depth here) nearly a quarter of all responding firms cite quality of labor as their biggest single issue.  That was up two points from last month and is in the 97th percentile of all readings.  Current levels are actually right back to where things stood right before the pandemic began. Of all single issues, this is the biggest problem for businesses.  While quality of labor became a more widely reported issue, fewer responding firms reported the cost of labor to be their biggest problem (6% in November vs 8% in October).  Given the two canceled each other out, the same percentage (30%) of companies reported either cost or quality of labor as their biggest issue in November as has been the case every month since August.

Of the other issues, poor sales and competition from big businesses are two other single issues that weigh heavily on the minds of small businesses with 13% and 9% of firms, respectively, reporting these as the biggest issues.  While that is still an elevated reading for poor sales, it is off the peak of 19% earlier this year.  Meanwhile, inflation, interest rates, insurance, and “other” were of less importance in November with the latter two of these both falling month over month in November. On a combined basis, only 14% of firms report one of these to be the biggest problem.

That leaves government red tape and taxes. In the wake of Biden’s victory, the share of companies reporting taxes as their biggest issue rose by 3 percentage points to 20%.  That is the highest share of respondents reporting this as their biggest problem since the end of 2017; right around the time of the Trump tax cuts.  Including the share of respondents that report government red tape and requirements, which was unchanged at 14% in November, more than a third of small businesses now report government-related issues to be their biggest problems.  That uptick in the combined reading was not any sort of record but was nonetheless significant in the top 20% of all monthly changes.  Perhaps more important, it marks a potential trend reversal in what businesses view as their biggest problems.

While Republican administrations are typically viewed as more business-friendly than Democratic ones and vice versa, that has not necessarily been the case historically. Namely, George H.W. Bush’s term saw taxes and government requirements become more of a concern among small businesses before that was reversed in the Clinton years. But most of George W. Bush’s tenure up through Trump’s time in office, the moves in the percentage of small businesses reporting government-related issues as their biggest problems have been more consistent with the aforementioned statement.  Most of President Obama’s time in office saw taxes/red tape become a growing concern with a big reversal in the trend once Trump’s tax cuts came to fruition in 2017. With Obama’s VP now set to take office, it begs the question if the same trend from 2008 through 2016 is set to return.

Time will tell if the uptick in the most recent month is the early stages of a new trend, but it could also more generally come down to overall policy uncertainty which remains elevated as could be expected with stimulus talks still ongoing and a new administration around the corner.  In the chart below we show the NFIB’s reading on Economic Policy Uncertainty.  Headed into the election, October’s reading of the index spiked to the second-highest reading on record.  So what was the higher reading? It came in November of 2016 just after the presidential election.  With the 2020 election now more or less in the rearview, November’s reading on uncertainty has taken a turn lower dropping from 98 down to 90, but that is still in the 98th percentile of all prior readings.  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

This morning the NFIB released their monthly reading on the small business sector. With case counts rising throughout November, small business optimism took a hit.  Compared to September and October’s identical readings of 104, November’s reading fell to 101.4.  Although that is lower, it remains above the levels seen from March through the summer. Additionally, there were several silver linings in this month’s report.

Glancing across the various components and sub-indices of the report, breadth was pretty mixed.  Of the ten components of the headline number, six fell and the remaining four were higher.  Of the other indices that are not inputs to the headline number, half of the indices were higher while another two were unchanged, and the other two were lower.

As for the most pressing problems reported by small businesses, there was little change overall.  Quality of labor remains the most widely reported problem, stealing share from those reporting the cost of labor as the biggest issue.  The second biggest issue and the only other one to see an uptick in November was taxes.  Perhaps due to the results of the election and the prospects of higher taxes down the road, the percentage of respondents reporting taxes as the most pressing issue rose 3 percentage points to 20%.

Taking a deeper dive into the individual components of the report, the various indices concerning employment metrics were pretty strong in November.  While the index for actual employment changes remains negative meaning more businesses reported declines in employment rather than increases, that is not to say businesses are not looking to gain employees.

For starters, a higher number of responding firms (34% vs 33% in October) reported that they had at least one unfilled job opening in November. That is in the top decile of all historical readings. Breaking that number down further, the NFIB highlighted that 29% of those were for skilled workers and 13% were for unskilled workers.  Additionally, businesses do plan to fill open positions in the near future. The index for plans to increase employment rose from 18 in October to 21 last month.  Overall, more than half of firms said that they either hired or are trying to hire as 30% reported that either cost or quality of labor have been the biggest roadblocks to their business. Given these apparently tight labor conditions, the indices for compensation and plans to increase compensation were both higher.

We would also note that the divergence between businesses wanting/trying to fill positions and declines in the actual number of employees reported is consistent with what we saw in last week’s data from the ISM report.

Rising employment and compensation can be justified when looking at the indices concerning sales and earnings.  While these broadly took turns lower this month, they remain at readings that are consistent with more companies than not seeing sales growth. The index for earnings changes turned a bit lower falling from -4 to -7. Despite that, it is still a level that is at the top of its historic range.  Additionally, a net 5% of reporting firms saw higher sales over the past three months, down slightly from 6% last month.

In turn, the net percentage of owners expecting sales to be higher also fell to a reading of 10% from 11% last month. Even though sales were a bit weaker, prices have continued to rise. The index for companies reporting higher prices rose from 15 to 18.  That is the highest level of that index since a reading of 19 in May of 2018. NFIB highlighted further that the most common businesses to report higher prices were retail (28%) and wholesale (23%).

Although the decline in expected sales was modest and businesses plan to increase hiring, the index that took the biggest hit in November was the reading for expectations for the economy to improve.  That index for the general outlook of business conditions fell 19 points month over month to a low reading of 8.  That is the lowest level since March when the index was 3 points lower at 5.  Additionally, the only time the index has declined by more in just one month was in November of 2012 when it fell from 0 to -38 in just one month. Other indices like those for expenditures and whether or not it is a good time to expand similarly remain weak, but did not see the same sort of dramatic declines.

Looking at other indices though, this decline appears to have been relatively extreme. A net 5% of owners report inventory levels are too low which is tied with September for a record high.  While a greater share of firms plan to increase rather than reduce inventories, that index did fall from a 48-year high of 12 last month down to 5 in November.  Despite that historically large single month decline, this monthly reading is still at a strong level.  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

Over the past week, we have frequently noted the strong performance of industrial metals like iron ore in today’s Morning Lineup and steel last week. While industrial metals have shown strength, precious metals haven’t exactly been weak.  Silver was one of the top-performing commodities last week as the Silver Trust (SLV) rose above its 50-DMA, gaining 6.79% on the week.

While precious metals performed decently last week, as shown from the snapshots in our Chart Scanner, both gold (GLD) and silver (SLV) remain well off their highs and in a downtrend since mid-summer.

Despite this downtrend over the past few months, positioning around the gold and silver remains pretty bullish. In the charts below, we show data from the Commitments of Traders (COT) report which we typically cover in every Friday’s Closer. With regards to gold, a net percentage of 48.38% of speculators are bullish on the yellow metal. That reading is in the 97th percentile of all readings in the history of the data dating back to the mid-1980s.  The only time a larger share of positioning was bullish was earlier this year, in August of last year, 2016, 2009, and very briefly in December of 2005. As for silver, positioning likewise is bullish, though, not to nearly as extreme of a degree. Silver’s reading is in a much more modest 75th percentile of all readings.

Again, industrial metals have ripped higher recently and the strong gains in copper have been consistent with positioning. As shown below, 33.17% of open interest for copper is long on net.  This reading has taken a near-vertical run higher over the past several months, and Friday’s reading reached the highest level since January of 2004.  That most recent reading stands in the upper 2% of all readings. Click here to view Bespoke’s premium membership options for our best research available.