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Small Businesses and Negative Rates - August 13, 2019

“Small Business Sector Continues to Defy Expectations”

Juanita Duggan, NFIB President and CEO, commented on the latest NFIB Small Business Optimism Index report “while many are talking about a slowing economy and possible signs of recession, the 3rd largest economy in the world [, US small businesses,] continues to defy expectations, generating output, creating value, and expanding the economy.... and the only thing stopping them [from growing their operations] is finding qualified workers”. This is a bold statement with the 2s-10s curve threatening to invert at any moment. But the data bears out her statement. The Optimism Index rose to 104.7, “an exceptional reading”, with seven of the ten components improving month on month. Trends in earnings and sales improved and plans to create jobs and make capital outlays “also advanced”, though capital spending “remains a bit anemic historically”. While the broad picture is still good for small businesses, the labor market continues to be a sticking point. “Job creation slowed in July” and, echoing the dynamics discussed in Eye On Housing, finding skilled workers is becoming an obstacle. “Finding qualified workers is becoming increasingly difficult with a 46-year record high of 26 percent [of firms] reporting finding qualified workers as their number one problem.” William Dunkelberg, NFIB Chief Economist, further supported Duggan’s claims. “Contrary to the narrative about impending economic doom, the small business sector remains exceptional... small business owners remain very optimistic about the economy but are being hamstrung by not finding the workers they need”, Dunkelberg said.

“It’s Not That Big of a Deal”

As pundits continue to ponder negative-yield debt and warn of potential problems for the economy, none other than the “Maestro”, Alan Greenspan, has said: “zero has no meaning”. In an article from Bloomberg, Greenspan explains that low yields in the US are partly an effect of international arbitrage, but “may also be due to forces having altered people’s time preferences”. However, he warns that the historical stability of time preferences means that “these changes won’t last long”. Further muddying the picture for bondholders is inflation. While the NFIB survey discussed above announced “reports of higher average selling prices stabilized, no evidence of a pickup inflation”, today’s CPI data beat expectations. In addition to 1.8% headline inflation, Core CPI rose 2.2% YoY. What’s more, the Atlanta Fed’s “sticky” CPI, which is “useful when trying to gauge where inflation is heading”, is up 2.5% YoY. Though the Fed prefers Core PCE over any of the data released today, firm inflation data would be yet another curveball for the Fed as they ponder future interest rate moves.


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