Industry Crib Sheet: Small Businesses Show Less Confidence

July 14, 2014

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U.S. small business sentiment weakened in June, ending a three-month run of improving optimism, as many business owners felt less confident about their sales prospects and the economy.

The National Federation of Independent Businesses' Small Business Optimism Index fell from 96.6 in May, which was a six-year high, to a 95 reading. The 1.6-point decline was largely attributed to a 10-point plunge among business owners who think economic and business conditions will improve in the next six months. Small business owners also hinted at a pullback on capital spending because of the less positive outlook.

Six of the NFIB index's 10 components fell, with only two sub-indexes, job creation plans and current job openings, showing gains of 2 points each.

Main Street employment growth is corroborating the Labor Department's strong job growth data in recent months. In June, U.S. employers created 288,000 jobs in June, according to federal statistics, much higher than expected. However, the jobs data is conflicting with slow retail spending and industrial output data about the health of the U.S. economy.

Last month, the small business sector generated a net gain in workers for the ninth straight month, the best string of gains since 2006. The NFIB said job creation plans among small businesses are approaching levels that usually coincide with a growing economy, despite weakened expenditure and business expansion plans, sales earnings, and sales expectations. "This means more jobs but not much more output," said Bill Dunkelberg, NFIB's chief economist.

Despite the improving jobs picture, small businesses continued to have problems finding qualified workers. A full 53 percent of business owners said they tried to hire workers in the last three months, and 43 percent reported few or no qualified applicants for the posts. Meanwhile, 29 percent of small businesses reported at least one unfilled job opening.

Lower sales expectations are motivating fewer owners to reinvest in their businesses. The number of owners planning capital outlays in the next three to six months fell 2 points to 22 percent, and the number of owners that said it's a good time to expand facilities tumbled 3 points to 7 percent. In June, 54 percent of survey respondents reported making capital outlays, down 1 point from May.

The number of small businesses expecting greater sales volumes was 11 percent, 2 points lower than the previous month, while the percentage of businesses reporting higher nominal sales in the past three months ticked down a point to negative 2 percent. The NFIB said this is still one of the best readings since the recession. However, with sales still at historically weak levels, small businesses have had little incentive to build their inventories, with the number of businesses looking to add stocks at negative 1 percent.

Dunkelberg said he expects economic growth for the rest of the year to remain subpar and forecasts a 2.5 percent GDP expansion for all of 2014.

Natural Gas, Gasoline Prices to Finish Year Higher

A mild summer thus far has kept downward pressure on natural gas prices after they soared to record highs at the beginning of the year. But the average price of natural gas is expected to jump 28 percent this year, which will result in a rebound in coal production to feed the nation's power plants.

Natural gas prices are expected to average $4.77 per million British thermal units (MMBtu) for 2014, according to the latest short-term energy outlook by the U.S. Energy Information Administration. Prices have been hovering near $4.40/MMBtu over the last few months, as relatively mild temperatures across the nation have resulted in less need for air-conditioning and thus lower load demands on utilities. This contrasts with the beginning of the year, when record-low winter temperatures pushed up home heating demand and natural gas prices over $6/MMBtu.

However, natural gas prices still remain significantly up from 2013's $3.73/MMBtu average.

Lower natural gas demand in recent months has enabled producers to replenish inventories. Although natural gas working inventories on June 27 totaled 1.93 trillion cubic feet (Tcf), 26 percent below the level at the same time a year ago and 29 percent below the previous five-year average (2009-13), EIA Administrator Adam Sieminski said inventories increased at a record pace during May and June. More than 1 Tcf of natural gas has been added to storage since mid-April, marking the quickest 1-Tcf increase since 2003.

Projected natural gas working inventories will reach 3.43 Tcf at the end of October, or 0.38 Tcf below the level at the same time last year. EIA expects the average price for natural gas to fall to $4.5o/MMBtu in 2015.

Sieminski said because of the jump in natural gas prices this year, U.S. coal production is expected to grow 2.7 percent in 2014, as power utilities rely more on coal to generate electricity. Meanwhile, U.S. hydropower generation is forecast to tick down 1 percent this year, due in part to less rainfall in the Pacific Northwest, where a large portion of the country's hydropower is produced.

Elsewhere in the EIA's latest short-term energy outlook, prices for regular gasoline are falling. Regular gasoline retail prices for the summer driving season are forecast to average $3.66/gal, 8 cents higher than last year. Regular gasoline retail prices are projected to fall from an average of $3.68/gal during the second quarter to $3.64/gal during the third quarter. EIA expects regular gasoline retail prices to average $3.54/gal in 2014 and $3.45/gal in 2015, compared with $3.51/gal in 2013.

"Recent pump prices reflect higher crude oil prices, which rose in mid-June because of the unrest in Iraq that raised concerns over possible disruptions to the country's oil exports," Sieminski said. But he added, "Rising U.S. crude oil production is on track to cut the amount of petroleum liquid fuel imports needed to meet domestic fuel consumption in 2015 to the lowest level in 45 years."

U.S. total crude oil production, which averaged 7.4 million barrels per day (bbl/d) in 2013, is expected to average 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015. The 2015 forecast represents the highest annual average level of oil production since 1972.

The growth in domestic production has contributed to a significant decline in petroleum imports. The share of total U.S. liquid fuels consumption met by net imports was an average 33 percent in 2013, compared with 60 percent in 2005. EIA expects the net import share to decline to 22 percent in 2015, which would be the lowest level since 1970.

White House Pushes for Job Training with New Aid

The U.S. Labor Department has awarded 32 states as well as Puerto Rico and the Cherokee tribal nation $154.8 million to fund job-driven training programs for laid-off workers and the long-term unemployed. The funding, green-lighted by President Obama, is directed at the creation and expansion of private-public partnerships on programs for on-the-job training, including apprenticeships in the manufacturing sector.

The grants were the latest move by the Obama administration designed to spur growth of skilled labor such as those in manufacturing. Since January, the nation has been producing jobs at the fastest clip since 2006. However, much of that growth has been in the retail and service sectors.

This year, the Obama administration has announced a number of federal initiatives to develop high-tech and skilled-trade workers for a number of industries that are having difficulties finding qualified labor, including the launch of three so-called innovation hubs for advanced manufacturing technologies. The initiatives are being entirely supported by funds that already exist in the federal budget, President Obama has said.

The latest awards, announced in late June, will be administered through the Job-Driven National Emergency Grant program, which was created after the 2008 recession to help dislocated workers with on-the-job training.

Among the 32 states to receive aid, a number will get the maximum appropriation of about $6.2 million, including manufacturing-heavy states California, Illinois, and Michigan. Other states will receive grants ranging from $775,000 (for Alabama) to about $5.14 million (for Maryland).

The Obama administration says it will release roughly $1 billion in funds this year, through the Labor Department, in support of schools, state and local governments, and private organizations and employers that are working together to provide skills training to workers for in-demand jobs.

In June, the White House also announced 12 regions across the United States that will receive $1.3 billion in aid from 11 federal agencies designed to stimulate private-sector investment and turn them into manufacturing hubs, in a program called the Investing in Manufacturing Communities Partnership.

The president has also committed about $240 million so far to four regional R&D and innovation hubs as part of his vision for building a national network for advanced manufacturing over the next 10 years. The hubs will also serve as high-tech workforce development centers.

Later this year, $500 million in competitive federal grants will be awarded to community colleges in all 50 states that are working in public-private partnerships to implement job-training programs with industry-recognized standards and credentials. In the fall, the Labor Department will also award $100 million to organizations through the American Apprenticeship Grants competition. 

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