Optimism among small business owners dropped last month after a flat January, as uncertainty about the economy and political environment weighed down.
The National Federation of Independent Business’ (NFIB) Small Business Optimism Index fell 2.7 points to 91.4 in February, with a pre-recession reference of 100. Business owners felt less confident about the economy, sales, expanding their businesses, and their plans to hire. Although hiring in February was better than expected, with employers who added workers outnumbering those who reduced payrolls, 22 percent of owners were unable to fill job openings (unchanged from January), and the employment component of the index worsened by 5 points.
“Uncertainty is a major cause,” said Bill Dunkelberg, NFIB’s chief economist, of the overall drop in the index. “Lacking any progress in Washington and facing continued unknowns with the healthcare law, [Environmental Protection Agency regulations], the minimum wage, tax reform … it’s no surprise that the [index] fell, reversing a few months of modest gains.”
The uncertainty could slow capital investments by small businesses at least in the short term, despite the fact that credit “continues to be a non-issue,” according to the NFIB, and there are signs this is already happening. While 25 percent of business owners surveyed by the NFIB plan to outlay capital for fixed assets within the next six months (a 1 point uptick over January), business investments in February fell 2 points from January. Only 2 percent of survey respondents said financing was their top business problem.
Small business owners are also being cautious about raising stockpiles without a clearer picture ahead of them, and they also blamed lower sales expectations. They continued to draw down their inventories in January, while the net percent of owners that plan to add inventory in the coming months fell to -5 percent. In other words, more businesses than not are showing little appetite to stock up. “Business owners aren’t going to bet their money on a future they cannot see clearly,” Dunkelberg said.
The net percent of owners reporting higher nominal sales in the past three months compared with the prior three months improved 2 points but was still in negative territory. The sales expectations component of the index plummeted by 12 points, however, and the number of business owners who think the economy will get worse grew by 8 percent. “The plunge in expectations for sales in the coming months and for business conditions six months from now show that we shouldn’t expect blue skies soon,” said Dunkelberg.
Although 16 percent of owners cited weak sales as their number-one problem, most owners reported regulations and red tape as their biggest problem, followed by those that cited taxes.
Machining Firms Slow Down Equipment Buying
The U.S. metalworking industries showed mixed signs in January, according to the latest data released by the McLean, Va.-based AMT – Association For Manufacturing Technology. Manufacturers ramped up their spending on cutting tools, a proxy for production activity for metal parts and components, with a 14.5 percent jump in consumption over December. But capital investments in metal cutting and metal fabrication machinery tumbled 25.2 percent in the first month of 2014.
The January activity among machining companies, which include job shops, captive machine shops, and contract manufacturers, was a reversal of December, when businesses closed 2013 on a high in machine tool orders but spent 11.7 percent less on cutting tools. The $158 million in cutting tool demand in January suggests that machine shops were working off production backlogs that had built up in December because of a short month in terms of business days.
Yet it also suggests that these shops operated in January despite tough winter conditions across much of the country that slowed down the nation’s manufacturing sector. The latest industrial production report released today by the Federal Reserve shows factory production fell 0.9 percent in January — a downward revision from an earlier estimate of -0.8 percent. (Both manufacturing and industrial activity rebounded in February with 0.8 and 0.6 percent expansions, respectively.)
“The last four months have been marked by volatility,” said Brad Lawton, chairman of AMT’s Cutting Tool Product Group. Still, shipments of cutting tools have continued to drop since 2012 and were mostly flat last year. January’s total was down 10.6 percent compared with the same month in 2013.
January orders for machine tools and metal forming equipment totaled $365 million — nearly $130 million less than December — and snapped a five-month streak of orders expansion. While December orders were the highest monthly total for 2013, capital investments in forming and metal cutting machinery have weakened year over year.
“While monthly order totals are down from December, January is always a soft month and more so this year due to an unusually harsh winter,” said AMT President Doug Woods, who added that he remains positive because of “strong indicators for near-term capital investment.” The combination of aging fixed assets at metalworking manufacturers and historically low interest rates should encourage capital spending this year and in 2015.
January orders for capital goods, calculated by the Department of Commerce, showed a 5.5 percent demand improvement for metalworking machinery. The federal government’s tracking data differs from AMT because it also includes all other types of metalworking equipment, such as casting machinery.
Woods is also keeping optimistic as 2014 is an “IMTS year.” AMT owns and manages the International Manufacturing Technology Show, which is held biennially in Chicago and is one of the largest industrial trade shows in the world, with a multinational visitor base. Sizable jumps in machinery orders typically occur in the immediate months following the IMTS.
Petrochem Markets Dip, Lowering Plastics Prices
Global petrochemical prices in February fell by 3 percent to $1,387 per metric ton (mt). According to the Platts Global Petrochemical Index (PGPI), prices outpaced losses in global markets for naphtha, the primary feedstock in petrochemicals production. Petrochemicals are intermediates used to make plastics and rubber polymers employed for goods found in nearly all industries.
Petrochemicals prices have see-sawed over the past several months, but February levels were 5 percent lower than those in February 2013. Meanwhile, naphtha prices fell 1 percent to $613/mt.
Prices for olefins, the precursor to a family of plastics used to make everything from packaging to consumer electronics housings, declined last month. Ethylene prices fell 4 percent to $1,291/mt, and polyethylene prices moved in lockstep by falling 3 percent to $1,655/mt. Propylene prices averaged $1,405/mt, down 1 percent from January, pushing down the polypropylene market by 1 percent, as well, to $1,645/mt.
Benzene prices declined 2 percent to $1,391/mt, providing just a bit of relief in a market that has been characterized by tight supply and record prices as a result. Benzene is used downstream to produce polystyrene (PS) and acrylonitrile-butadiene styrene (ABS) resin. PS is used typically for rigid packaging, such as compact-disc storage cases, while ABS applications include car interiors and electronics enclosures.
Toluene slipped to $1,104, and paraxylene posted the biggest drop with a 4 percent price reduction to $1,232/mt. Toluene is turned into polyurethane and surfacing products, and paraxylene is made into fibers and polyethylene terephthalate (PET), used commonly for water and beverage bottles.
Energy Prices Normalizing, but Electricity Going Up
Cold temperatures this winter strained energy distribution networks and put pressure on consumption and prices of fuels used for space heating. Average “heating degree days” were 13 percent higher than last winter and 10 percent above the 10-year average, according to the Energy Information Administration (EIA).
The cold weather had the greatest effect on propane prices, particularly in the Midwest. Cold temperatures tightened supplies that were already low heading into the winter. Residential propane prices in the Midwest more than doubled from an average of $2.08/gal in December to $4.20/gal at the end of January but fell back to $2.78/gal in early March. Northeast propane prices were 15 percent higher than last winter.
Cold temperatures also tightened heating oil supplies and drove up retail prices. Since the beginning of the year, distillate inventories in the Northeast have fallen to 6.4 million barrels below inventory levels of 2013. Weekly U.S. residential heating oil prices increased by $0.20/gal during January and have averaged around $4.24/gal since the beginning of February. Despite the recent increases, EIA expects that U.S. heating oil prices will turn out 1 percent lower than during last year’s winter heating season, mainly because of lower crude oil prices.
The cold contributed to large withdrawals of natural gas from storage and a surge in natural gas spot prices, which hit record levels in several markets during periods of extreme cold. Natural gas working inventories in late February totaled 43 percent below levels in the same time a year ago and 39 percent below the five-year average. But at the end of February, both spot and futures prices declined rapidly, falling below $5/MMBtu. Henry Hub natural gas spot prices were volatile over the past two months, and EIA expects that it will average $4.44/MMBtu in 2014 — higher than its initial 2014 projection. The agency’s 2015 projection is $4.14/MMBtu.
Led by falling crude oil prices, the projected U.S. average regular gasoline retail price will continue to fall to $3.45/gal in 2014 and $3.37/gal in 2015. Gas prices already fell from $3.63/gal in 2012 to $3.51/gal in 2013. Diesel fuel prices, which averaged $3.92/gal in 2013, are projected to average $3.85/gal in 2014 and $3.78/gal in 2015.
Annual average coal prices to the electric power industry fell for the second consecutive year, from $2.38/MMBtu in 2012 to $2.35/MMBtu in 2013. EIA forecasts average delivered coal prices of $2.36/MMBtu in 2014 and $2.37/MMBtu in 2015.
EIA expects the U.S. residential price of electricity to average 12.3 cents per kilowatt-hour during 2014, an increase of 1.9 percent from 2013. Residential electricity prices are expected to increase 2 percent during 2015.