Tuesday, December 13, 2022

The Feel From Small Business

This morning's release of the National Federation of Independent Business (NFIB) -- i.e., small business -- Optimism Index (an input to our "PWA Index") jibes pretty well with our present assessment of overall general conditions, and with this morning's inflation read from the CPI report.

Recall that we see odds favoring recession in 2023, although, at this juncture, we see it to be mild by historical standards.

Here's from the report... Emphasis mine...

Forecasters have been predicting a recession since early in the year. The Small Business Optimism Index has been below its 49-year average all year and in historical recession territory most of that time, so small firms are forecasting a decline as well. But, everyone is not on board – yet. Consumer spending has been solid, most recently led by spending on new cars, now more available with the chip shortage fading, and supported by a declining saving rate out of an improving income, plus more credit use. Job creation is much lower than a year ago, but still solid while the labor force participation rate drifts lower. The Establishment Survey has reported job gains that are still positive, but trending down. The Household Survey continues to show employment declines, consistent with NFIB firms hiring reports.

The Leading Economic Indicators and the inverted yield curve clearly signal a recession ahead. The labor market is slowing but hasn’t crashed. Sometimes recessions appear quickly, triggered by major events like a financial market collapse (2008) or a government shutdown (Covid). But more typically, the economy eases into recession. Responding to the Fed’s interest rate policy does not happen quickly and the Fed does not reach its terminal policy rate level (about 5% expected) overnight. NFIB’s leading economic indicator has never missed in 50 years, and it predicts a slowdown.

NFIB data suggest that inflation pressures are easing, with the percent raising selling prices falling from 71% early in the year to 56% in November. Over the same period, the percent cutting prices has doubled from 4% to 8%. The percent reporting higher labor compensation has decline from 50% to 39%, a reduction in the pressure to raise prices to cover costs. The percent of owners planning to raise prices averaged over 50% early in the year now stands at 35%. Inflation is fading on Main Street, but prices are still high and the percent still raising prices is too high to put inflation at the 2% Federal Reserve target. And, when inflation finally reaches the 2% level, the level of prices will still be much higher than they were a year or two years ago.

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