NFIB Small Business Trends for October Continue to Show No Recovery, Inflation Not a Threat; Fed Governor Hoenig Blasts Bernanke’s QE Strategy

Every month I report on NFIB small business trends and every month it looks like a broken record. October is no different. Please consider NFIB Small Business Trends for October.
The Index of Small Business Optimism gained 0.2 points in September, rising to 89.0. The increase is certainly not a significant move, but at least it did not fall. Still, the Index remains in recession territory. The downturn may be officially over, but small business owners have for the most part seen no evidence of it.

Eleven (11) percent (seasonally adjusted) reported unfilled job openings, unchanged from August and historically very weak. Over the next three months, eight percent plan to increase employment (unchanged), and 16 percent plan to reduce their workforce (up three points), yielding a seasonally adjusted net negative three percent of owners planning to create new jobs, down four points from August, The decline in hiring plans is an unexpected reversal in job creation prospects. Hiring plans continue to underperform the recoveries following previous recessions.

The environment for capital spending is not good. The frequency of reported capital outlays over the past six months rose one point to 45 percent of all firms, one point above the 35 year record low. Six percent characterized the current period as a good time to expand facilities, up two points, but historically low. A net negative three percent expect business conditions to improve over the next six months, a five point improvement from August, but still more owners expect the economy to weaken than strengthen.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months lost one point, falling to a net negative 17 percent. The reading is 17 points better than June 2009 (the recession bottom) but still indicative of very weak customer activity.

Reports of positive profit trends deteriorated three points in September, registering a net negative 33 percentage points, 29 points worse than the best expansion reading reached in 2005.

Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 53 percent said they did not want a loan. Only three percent reported financing as their #1 business problem. However, 30 percent of the owners reported weak sales as their top business problem. The historically high percent of owners who cite weak sales means that investments in new equipment or new workers are not likely to “pay back” and thus loans taken to finance the outlays can’t be repaid.

Inflation Not A Threat

Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell, and apparently a majority at the Federal Reserve are now worried. New “inflation targets” are being floated out there, like two percent (characterized as price stability?). This will be the justification for more “quantitative easing”. Buying more Treasury securities may push rates even lower, but to what end? The impact on home sales will surely be minimal. With mortgage rates at record low levels already, even lower rates are unlikely to invite new entrants to the market. Of course, there may be other “agendas” such as a weakening of the dollar and support for asset prices. This is very dangerous as hundreds of billions of dollars are being “allocated” based on false prices (interest rates). The charade can’t be maintained forever and weakening the dollar only invites others to join the party. And lost in all of this focus on credit is the loss of hundreds of billions in interest rate income for savers. Certainly their spending has been curtailed as a result. Every dollar a borrower saves from some sort of refinance deal is a dollar of interest income lost to savers. Even lenders will lose income as loans with interval rate re-sets will be set based on historically very low Treasury rates (lowering net interest margins). No wonder confidence is low and uncertainty is high, it is hard to make sense of this.Inflation Not A Threat

I repeated the above headline in bold for the benefit of misguided inflationistas everywhere who confuse rising commodity prices with inflation when there is literally no passthrough to consumer prices.

If that was not bad enough (and it is), the fact of the matter is inflation is not about prices at all but rather about the expansion of credit.

Small businesses inn general do not want it or need credit to expand. Indeed, the very last thing on their minds is expansion. The first thing on their minds is lack of customers and inability to pass on costs.

This folks is clearly deflation in action and it is what the Fed is fighting with a misguided Quantitative Easing strategy.

Fighting deflation and winning the battle are two different things!

Yet, it is amazing how many mistake Inflation Expectation Noise with actual inflation.

Hoenig doubts effectiveness of additional Fed asset purchases

I am not the only one who thinks QE is a hopeless strategy. Please consider Hoenig Doubts Effectiveness of More Fed Purchases
Thomas Hoenig, the Federal Reserve’s longest-serving policy maker, cast doubt on the effectiveness of a possible new round of asset purchases to stimulate the economy, saying the costs are likely to outweigh the benefits.

Undertaking such a move without clear terms and goals “becomes an open-ended commitment that leads to maintaining the funds rate too low and the Federal Reserve’s balance sheet too large,” Hoenig, president of the Kansas City Fed, said in the text of a speech today in Denver. “The result is a further misallocation of resources, more imbalances, and more volatility.”

The benefits of further purchases “are likely to be smaller than the costs,” he said to the National Association for Business Economics.

“These are difficult times, no doubt, and it is tempting to think that zero interest rates can spark a quick recovery,” he said. “However, we should not ignore the possible unintended consequences of such actions.”

In response to audience questions, Hoenig said that while the Fed is “scared to death” of the possibility of a persistent decline in prices, he senses “that we should not see deflation.” Hoenig added that he is concerned “that we not be subject to the market’s demands” when it comes to expectations for more quantitative easing, and the Fed must be “mindful” of the effect its actions are having on other countries.Praise for Hoenig

If one mistakenly defines deflation as a decrease in prices, it is possible we do not see deflation. If one correctly defines deflation as falling credit, we are in it.

Although it appears Hoenig does not properly understand inflation and deflation, he is light years ahead of Bernanke in comprehension as to what the risks are of Bernanke’s misguided QE strategy is, not only on US savers, but on the effects our outrageous policies have on the rest of the world.

Thoughts on Fighting the Fed

Economist Tim Duy says “Bad things happen when you fight the Fed. You find yourself on the wrong side of a whole bunch of trades. In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess. There may really be no other way for it to end, because its end yields clear winners and losers. And the losers, in this case largely emerging markets, [are] not prepared to accept their fate.”

I say it is beyond arrogant for the Fed to dictate its misguided policies on the rest of the world.

After all, the Fed’s policies under Greenspan and Bernanke fueled the biggest housing and credit bubbles the world has ever seen.

Bernanke, failed to see the recession coming, failed to see the housing bubble, failed to see the unemployment rate rising above 8.5%, and just plain failed at damn near everything.

We would not be in this big of a mess were it not for the Fed and its idiotic manipulation of interest rates, trying to meet some asinine (as well as physically impossible) dual mandate.

For more discussion, please see Krugman and the Inevitable “I Told You So” – Tim Duy “Bad Things Happen When You Fight the Fed”; Final End of Bretton Woods 2?

Mike “Mish” Shedlock
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