In September 2019, I wrote “NFIB Survey Trips Economic Alarms,” Of course, it was just a few short months later the U.S. economy fell into the deepest recession since the “Great Depression.” The latest NFIB survey is sending a strong warning to investors piling into small-cap stocks.
While the mainstream media overlooks the NFIB data, they really shouldn’t. There are currently 30.7 million small businesses in the United States. Small businesses (defined as fewer than 500 employees) account for 99% of all enterprises, employ 60 million people, and account for nearly 70% of employment. The chart below shows the breakdown of firms and jobs from the 2019 Census Bureau Data.
Despite all the headlines about Microsoft, Apple, Tesla, and others, small businesses drive the economy, employment, and wages. Therefore, what the NFIB says is relevant to what happens in the economy.
NFIB Shows Confidence Drop
In December, the survey declined to 95.9 from a peak of 108.8. Notably, many suggest the drop was “politically driven” by conservative owned businesses. While there was indeed a drop following the election, the decline continues what started in 2018.
As I discussed when the index hit its record high previously:
“Record levels of anything are records for a reason. It is the point where the sustainability of activity cannot be increased further. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY, of a cycle.”
That point of “exuberance” was the peak of the economy.
Before we dig into the details, let me remind you this is a “sentiment” based survey. Such is a crucial concept to understand as “Planning” to do something is a far different factor than actually “doing” it.
An Economic Boom Will Require Participation
Currently, many analysts expect a massive economic boom in 2021. The basis of those expectations is massive “pent-up” demand when the economy reopens.
I would agree with that expectation had there been no stimulus programs or expanded unemployment benefits. Those inflows allowed individuals to spend during a recession where such would not usually be the case. Those artificial inputs dragged forward future or “pent-up” consumption into the present.
However, the NFIB survey also suggests much the same.
Small businesses are susceptible to economic downturns and don’t have access to public markets for debt or secondary offerings. As such, they tend to focus heavily on operating efficiencies and profitability.
If businesses were expecting a massive surge in “pent up” demand, they would be doing several things to prepare for it. Such includes planning to increase capital expenditures to meet expected demand. Unfortunately, those expectations peaked in 2018 and are lower again.
There are important implications to the economy since “business investment” is a GDP calculation component. Small business capital expenditure “plans” have a high correlation with real gross private investment. The plunge in “CapEx” expectations suggests business investment will drop sharply next month.
As stated, “expectations” are very fragile, and reality is often quite different.
Employment to Remain Weak
If small businesses think the economy is “actually” improving over the longer term, they would also be increasing employment. Given business owners are always optimistic, over-estimating hiring plans is not surprising. However, reality occurs when actual “demand” meets its operating cash flows.
To increase employment, which is the single most considerable cost to any business, you need two things:
Confidence the economy is going to continue to grow in the future, which leads to;
Increased production of goods or services to meet growing demand.
Currently, there is little expectation for a strongly recovering economy. Such is the requirement for increasing employment and expanding capital expenditures.