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U.S. Economy Escape Velocity, But Small Business Optimism Very Low and Headed in the Wrong Direction

Economics / Economic Recovery Apr 14, 2010 - 01:57 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleIf the US economy was about to reach "escape velocity" as Larry Summers says, small business optimism would not be in the gutter and sinking.


Thus, proof that Larry Summers is in Fantasyland can be found in a NFIB report that shows Small Business Optimism Declines in March.

The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history.

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

The index has posted 18 consecutive monthly readings below 90. In March, nine of the 10 Index components fell or were unchanged from February’s not-so-great readings.

Employment

While actual job reductions may have halted, plans to create new jobs remain weak. Over the next three months, 7 percent plan to reduce employment (down one point), and 15 percent plan to create new jobs (up two points), yielding a seasonally adjusted net negative 2 percent of owners planning to create new jobs, weaker than February and still more firms planning to cut jobs than planning to add.

Capital Spending

The frequency of reported capital outlays over the past six months fell two points to 45 percent of all firms, one point above the 35-year record low reached most recently in December 2009.

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent. Widespread price cutting continued to contribute to reports of lower nominal sales. The net percent of owners expecting real sales gains lost three points, falling to a net negative 3 percent of all owners, seasonally adjusted.

Inflation

The weak economy continued to put downward pressure on prices. Eleven percent of the owners reported raising average selling prices, but 29 percent reported average price reductions.

Earnings

In March, earnings trends declined with a net negative 43 percent of owners reporting positive profit trends.

Deflationary Report

The NFIB report is certainly deflationary. There is no ability for businesses to pass on cost increases nor any reason for small businesses to go on a hiring spree. Housing starts and small businesses optimism typically lead the economy out of recession. Both are absent.

In February, "poor sales" was the top concern of small businesses, and with expected earnings sentiment at negative 43 percent, it is all but certain small businesses are not about to go on a huge hiring spree.

Layoffs have stabilized, but there is no driver for jobs. However, it does take 100,000 to 125,000 jobs a month just to hold the unemployment rate steady.

Washington Does Not Get It

What Bloomberg columnist Caroline Baum said a month ago remains true today. Please consider Clueless in the Capital Meets Small-Business Ire

“Washington doesn’t get it.”

That generic statement is tripping off the tongues of populists and Tea Partiers, business groups and bankers alike. In short, the public is peeved at the politicians.

I heard it this week from William Dunkelberg, chief economist of the National Federation of Independent Business, who used his group’s latest survey to opine on Washington’s deaf ear for helping small business.

The president and Congress “pay lip service to the fact that small business generates half of private-sector GDP and employs 60 percent or more of private-sector workers,” Dunkelberg says. As far as Washington’s efforts to help this sector of the economy, “instead of stimulus, give consumers a tax cut,” he says.

Econ 101

The Right points to uncertainty over looming tax increases (aren’t death and taxes life’s two certainties?) and health-care mandates. The Left says the problem is banks aren’t lending.

The truth is a bit of both and something more basic. Small- business owners list “poor sales” as the numero uno problem. And the jobs tax credit for hiring new workers, proposed by President Obama and embraced by Congress, won’t do much to help. Employers aren’t about to pay a new worker $40,000 to earn a $5,000 credit unless that worker generates $35,000 of revenue, Dunkelberg explains. That’s Econ 101 (see “marginal revenue product” or “profit maximization”), a course most of our elected representatives seem to have missed.

The tax credit for hiring “has absolutely no impact on our decision-making,” says Phil Kenny, president of Trucks Unique, an Albuquerque, New Mexico, company that customizes pick-up trucks for commercial and individual purposes. “We have no tax liability to take a credit against.”

Tax Credits for Hiring an Inane Idea

Tax credits are a ridiculous waste of taxpayer money. Businesses will hire when they need to hire and not before. Not a single job will be created or saved by tax credits for hiring.

Moreover, and as Baum pointed out, we have the ridiculous proposition of Obama raising taxes and mandating health care, both of which hurt small business, while proposing tax-credit trinkets in return.

Instead, small businesses would be better served by tax cuts across the board. I covered this earlier today, before the NFIB report came out, in Mish Mailbag: IBM Abandons U.S. Workers

The solution is lower but equal taxes across the board, not higher taxes as President Obama is clamoring for. If one insists on a skew, it would be far better from a jobs standpoint to defer taxes in the US than overseas.

My own personal preference would be to slash the corporate tax rate to 10% or lower, preferably zero.

This would level the playing field between small and large corporations. It would also eliminate the need for a whole army of lawyers and lobbyists whose only function is to game the system.

Finally, elimination of corporate taxes would spur job creation at small businesses, right here in the US, where we desperately need Jobs. To top it off, money would flow to the US, in dollars, instead of overseas in some other currency.

President Obama's solution is ass backwards.

Inquiring minds may also be interested in "Banking System Still Quietly Insolvent" ; Larry Summers' Imagination Reaches Escape Velocity

One thing this economy desperately needs is to escape solutions offered by Larry Summers and President Obama.

The way to do that is throw the bums out and elect some legislative representatives who understand something about how the economy really works. For a list of candidates worthy of your support, please see Rice Lake Wisconsin Elects 19 Year old Ron Paul Fan as Mayor.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


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