VIPs
- The NFIB’s Small Business Optimism Index fell to 95.0 in January, missing almost every Bloomberg estimate; to start the new year, owner confidence stands three points below the long-run average and closer to the post-COVID low of 90.9 reached in April 2020
- Just 8% of small business owners saw January as a good time to expand, which normalizes to a -1.07 z-score; echoing this cautiousness, small firm demand for commercial & industrial loans continues to contract through Q1, per the Fed’s Senior Loan Officer Opinion Survey
- With nonfarm payrolls still 10 million in the hole, the labor force has not been challenged like this in generations; as small businesses remain squeezed with higher spreads and tighter lending standards, the commercial bank loan-to-deposit ratio also hit a record low last month
Before the advent of exhaustive online libraries – “Alexa, play ‘ABBA’s ‘Take a Chance on Me’” – music genres evolved over generations. The curators of yesteryear were Broadway and Hollywood, which gave old music new life. The 1970s Swedish pop group ABBA is archetypical. In October 2001, Mamma Mia!, the jukebox musical written by British playwright Catherine Johnson hit Broadway theaters for a 14-year run through September 2015. Based on the songs of ABBA composed by Benny Andersson and Björn Ulvaeus, former members of the band, it was a blast to partake in theaters. One of QI’s favorite scenes from 2008’s film adaptation is the wedding reception where Julie Walters serenades, flaunts, woos and chases Stellan Skarsgård to the tune of ‘Take a Chance on Me.’ Rumor has it the entire cast was three sheets to the wind when they filmed that scene. No wonder everyone looked so happy!
Right about now, American small businesses are wishing they were tipsy and in movieland’s alternate universe. Falling to 95.0, January’s National Federation of Independent Business (NFIB) Small Business Optimism index disappointed almost every Bloomberg estimate. Small Business We’d prefer to not report that Small Business Optimism is drawing a W-shaped recovery. The latest reading is a further fall from the September/October bounce to 104.0, a level a smidge shy of February’s pre-pandemic 104.5. At the start of 2021, owner confidence stands three points below the long-run average and closer to the post-COVID low of 90.9 hit in April 2020.
Behind the decline were weakening expectations about the economy, revenues and profits. NFIB Chief Economist and QI dear friend Bill Dunkelberg noted, “As Congress debates another stimulus package, small employers welcome any additional relief that will provide a powerful fiscal boost as their expectations for the future are uncertain. The COVID-19 pandemic continues to dictate how small businesses operate and owners are worried about future business conditions and sales.”
Over the last year, two of the index’s ten components with the highest correlations to the headline were real sales expectations (.92) and capital expenditure plans (.91). Contractions catalyzed by shocks such as C19 generate great uncertainty with regard to top-line revenues, something no small owner can control. This inability to anticipate probable outcomes, in turn, shelves expansion plans.
Small business owners are also part of a tight knit community, one they know firsthand is still suffering COVID-19 casualties. In the last week, Seattle lost Everyday Records, a mainstay in the Capitol Hill neighborhood for the past 18 years. After a decade serving up Tex-Mex fare in Cedar Rapids, La Cantina Bar N Grill is closing its kitchen for good. Since 2001, the Draught Horse Pub & Grill has been a Temple University watering hole. It will close as will Lee’s Hoagie House, across the street.
With this anecdata a constant backdrop, it should come as no surprise that last month, only 8% of small business owners said it was a good time to expand. This level of cautiousness has coincided with every recession since the inception of the NFIB survey in 1973. Want our favorite normalizer for good measure? The z-score (deviation from the mean adjusted for volatility) was a -1.07 in January.
Why won’t small businesses take a chance on expanding?
- Waiting for the next mega-stimulus from tag team Biden and Yellen with a side of the perma-Powell assist.
- Concerns about higher regulations under the new administration.
- A roll back of Trump’s corporate friendly tax cuts.
- Rising taxes to pay for wartime fiscal largesse, none of which is productive in its conception
- All of the above
Insights begin to manifest in the righthand chart. If you used the year-over-year (YoY) trend in the NFIB Good Time to Expand index (purple line) as a guide for annual performance in the bellwether small cap Russell 2000 index (orange line), you would have been offsides in the three months ended January. Wall Street is putting more weight on vaccines to bolster small stock returns and likely looking through the current wave of case counts and virus variants.
Main Street, meanwhile, is dealing with the reality of things, the sum of which is not generating sufficient animal spirits to achieve escape velocity. The green bars depict all you need to see. Per the Fed’s Senior Loan Officer Opinion Survey — small firm demand for commercial and industrial loans continued to contract through the first quarter of 2021. Owners are not taking any chances by levering up.
Bankers are fully aware of the lingering uncertainty. Nonfarm payrolls remain 10 million in the hole, and nearly 18 million people were collecting some form of unemployment insurance as of the week ended January 16. The labor force has not faced challenges like this in postwar America. To that end, the commercial bank loan-to-deposit ratio (red line, left chart) fell to a record low in January. Lenders equate the unemployment picture with the creditworthiness of the economy — they continue to squeeze small businesses with tight standards (yellow line) and higher spreads (blue line).
The jobs and jobless numbers clearly show it will be harder for many to pay their bills should we reach a fiscal cliff and loan forgiveness programs run out. As for Mama Mia’s BOWtique, the Erie, Pennsylvania children’s store closing next month, it won’t have the Money, Money, Money to wait it out.