Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
QE Forever: The Fed's Dramatic About-face - 21st Feb 19
Gold Technical Perspective – Why So Bullish? - 21st Feb 19
Sheffield "Mi Amigo" Memorial Fly Past at 8.45am on 22nd Feb 2019 - 20th Feb 19
Here’s The Real Reason You Stress About Money - 20th Feb 19
Five Online Marketing Predictions that will Matter in 2019 - 20th Feb 19
Has Gold Price Reached Upside Resistance Near $1340-1360? - 20th Feb 19
So Many Things are Not Confirming Stock Market Rally - 20th Feb 19
Forex Trading Management: The Importance of Being Prepared - 19th Feb 19
Gold Stocks are Following This Historical Template - 19th Feb 19
Here’s Why The Left’s New Economic Policies Are Just Stupid - 19th Feb 19
Should We Declare Emergency for Gold? - 19th Feb 19
Why Stock Traders Must Stay Optimistically Cautious Going Forward - 19th Feb 19
The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble - 18th Feb 19
Stacking The Next QE On Top Of A $4 Trillion Fed Floor - 18th Feb 19
Get ready for the Stock Market Breakout Pattern Setup II - 18th Feb 19
It's Blue Skies For The Stock Market As Far As The Eye Can See - 18th Feb 19
Stock Market Correction is Due - 18th Feb 19
Iran's Death Spiral -- 40 Years And Counting - 17 Feb 19
Venezuela's Opposition Is Playing With Fire - 17 Feb 19
Fed Chairman Deceives; Precious Metals Mine Supply Threatened - 17 Feb 19
After 8 Terrific Weeks for Stocks, What’s Next? - 16th Feb 19
My Favorite Real Estate Strategies: Rent to Live, Buy to Rent - 16th Feb 19
Schumer & Sanders Want One Thing: Your Money - 16th Feb 19
What Could Happen When the Stock Markets Correct Next - 16th Feb 19
Bitcoin Your Best Opportunity Outside of Stocks - 16th Feb 19
Olympus TG-5 Tough Camera Under SEA Water Test - 16th Feb 19
"Mi Amigo" Sheffield Bomber Crash Memorial Site Fly-past on 22nd February 2019 VR360 - 16th Feb 19
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

US Business Confidence Is Starting to Crack

Economics / Recession 2019 Feb 08, 2019 - 06:01 PM GMT

By: Patrick_Watson

Economics

Actions speak louder than words.

That’s why surveys asking people what they think about the economy aren’t always useful. Their actions might not match their words.

Of course, attitudes are important because they guide our decisions, even though we don’t act on them consistently.

Not everyone’s decisions have equal impact, though. Business owners and CEOs have more influence because they make bigger decisions: whether to create new jobs, raise wages, buy new equipment, and so on.


The economy has done “okay” the last few years largely because business leaders were confident in the future. We’ll know the end is coming when they lose that confidence.

And they’re starting to.

Disturbing Trend

The National Federation of Independent Business, a small-business advocacy group, compiles a monthly “optimism index.”

This is valuable data because small businesses drive job creation. And they are usually well informed about local conditions.

Here’s a graph showing the NFIB index from January 2000 to December 2018.



Graphic: NFIB

That big leap I circled in red is November 2016. The NFIB index climbed more in that one month than it fell during the entire 2008–2009 financial crisis.

Strange? Not really. Consider who is in this survey. It’s not a random sample of small-business owners.

NFIB surveys its own members, who are indeed business owners. But they also voluntarily joined an organization that advocates lower taxes, deregulation, and smaller government.

So of course Donald Trump’s election win made them happy. He had promised many things they wanted.

More significant is that they stayed happy and optimistic, and grew even more so. The NFIB index hit an all-time high in August 2018. Then it fell in each of the next four months.

Those declines are small and still leave the index higher than it was before the 2016 election. But it’s starting to look like a downtrend.

Given the lack of other positive news, it’s hard to imagine what would make the NFIB index turn higher from here.

Data reveals more disturbing signs:

  • Capital spending plans are back where they were in November 2016.
  • Only 16% of respondents expect to see better business conditions six months from now.
  • Just 24% said now is a good time to expand their businesses.

As noted, sentiment data is imprecise. None of this means an imminent breakdown. But it is concerning, especially when larger studies show similar attitudes.

Weak Spots

The Federal Reserve’s “Beige Book” is a collection of anecdotes, assembled eight times a year by regional Fed staff who talk to their business contacts.

It’s not infallible, but it’s good for general impressions.

Here is how the latest Beige Book summarized its findings:

“Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.”

So here again, we see optimism starting to fade. Let’s break down the factors they mention.

Increased financial market volatility: The stock market was falling as Fed staff collected these impressions, in some cases a lot. That has an impact on sentiment.

Rising short-term interest rates: Borrowing is getting more expensive as the Fed tightens policy. That makes business financing more expensive.

Falling energy prices: This one is a bit surprising. Lower fuel prices help some businesses (those who ship products, for instance) but hurt those involved in energy production. The Fed appears to be saying that damage to the energy industry outweighs the benefit of falling fuel prices to others.

Elevated trade and political uncertainty: This isn’t new, so I don’t get why they call it “elevated.” In any case, the developing trade conflict does make planning difficult for many businesses. Why make long-term investments when you have no idea what tariffs will pop up in the next year?

The regional summaries showed generally good news but also a few weak spots. Some examples…

  • New York: “Holiday season sales were a bit on the sluggish side but still up from a year ago.”
  • Philadelphia: “Further slowing occurred among service sectors, and some real estate activity declined.”
  • Richmond: “Manufacturers reported a decline in shipments and orders, and faced higher input costs due to tariffs.”
  • Kansas City: “District agricultural conditions remained weak.”
  • Dallas: “A broad-based deceleration was seen across manufacturing, services, retail, and energy.”

Ominously, the Dallas Fed added this to its summary: “Outlooks were markedly less optimistic than the previous report.”

They saw something new, a notable change just in the last few weeks. Maybe weak oil prices are hurting Texas more than we think.

But it’s not just business confidence cracking. Consumers are noticing it too.

This month, the University of Michigan’s consumer sentiment index slid to its lowest point since October 2016. And for similar reasons. The survey’s chief economist described it this way:

“The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown and the lack of clarity about monetary policies.”

Notably, consumers showed lower confidence for both present conditions and future expectations.

People know something is wrong. Their behavior and economic decisions will increasingly reflect it.

Worry Lines

None of this is reason to panic.

It does, however, support what other data has been telling us. US economic growth is slowing. That’s due to both cyclical factors and the Fed’s rate hikes and quantitative tightening.

The problem is that businesses are now far more leveraged than they were the last time we entered recession. It won’t take much to push default rates higher, which will lead to layoffs and lower consumer spending.

Loan defaults are a problem for lenders as well as borrowers. You can’t get blood from a turnip. Banks and bondholders who assumed they would get bailed out again may learn that conditions have changed.

Some economists think recessions are a kind of “necessary evil” because they purge excesses. I disagree with that perspective. Evil is never necessary… but it does exist.

We may see some of the economic kind soon.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules