Morning Report – NFIB Small Business Pessimism Survey 12/11/12

Posted on December 11, 2012 by Brent Nyitray

Vital Statistics:

  Last Change Percent
S&P Futures  1423.2 3.0 0.21%
Eurostoxx Index 2615.1 19.1 0.73%
Oil (WTI) 85.78 0.2 0.26%
LIBOR 0.31 -0.001 -0.32%
US Dollar Index (DXY) 80.09 -0.236 -0.29%
10 Year Govt Bond Yield 1.65% 0.03%  
RPX Composite Real Estate Index 190.8 0.3  

 

Markets are higher this morning on optimism for a deal on the fiscal cliff and a better-than-expected report on German investor confidence. The US government exited its AIG position. UBS will begin charging clients for deposits in swiss francs. Bonds and MBS are down.

The NFIB Small Business Survey fell off a cliff in November to 87.5. The survey blames the election, not Sandy. If people though uncertainty over the election was the cause of the nascent slowdown, this survey shows that it wasn’t.  Of course there is a correlation and causation effect happening here:  Does uncertainty cause a lousy economy, or does a lousy economy increase the risk that politicians will do something stupid? 

Chart:  NFIB Small Business Optimism:

Part of the reason for falling optimism is falling profits.  One claim constantly thrown out is “Profits are at record levels, why aren’t people hiring?”  Maybe it is because they are not, at least not in the small business arena.  This is even more profound when you consider that taxes are going up.  Small business should be pushing as many expenses as possible to next year in order to minimize their 2013 tax bite, which means that profits should be increasing now as their expenses are deferred.  Which means that underlying business profitability may in fact be lower.  

Chart:  NFIB Small Business Earnings:

Note that Bill Dunkelberg is a free-market sort of guy, so the language of his survey will reflect his political leanings.  That said, the numbers are what the numbers are. 

Ezra Klein of WaPo sums up where things really stand in the fiscal cliff negotiations.  The White House needs (a) an increase in tax rates for the rich, (b) a long-term solution to the debt ceiling, and (c) an extension of unemployment insurance. Republicans need something on the entitlement front – either an increase in the medicare eligibility age or a change in inflation calculations for Social Security. 

The change in inflation calculation involves a going to a “chained CPI.” One of the historical criticisms of the Consumer Price Index is that it fails to take into account the substitution effect, which means that as relative prices increase, consumers substitute cheaper goods for higher priced goods.  In other words, if the price of beef rises, consumers substitute chicken for beef. Since the CPI is based on a static basket of goods, it fails to take into account the fact that the basket of goods changes as relative prices change, which means that it overstates inflation.  The chained CPI is an attempt to correct for this. 

Today begins the two-day meeting of the FOMC. The Street is expecting that the Fed will announce an open-ended Treasury Purchase program, which could push its balance sheet to almost $4 trillion. The estimate is that the latest round of QE will add $500B in Treasuries to $620B in mortgage backed securities.  It will be interesting to see if the Fed notes its frustration that consumer borrowing rates are not falling in lockstep with mortgage backed securities.  It would be even more interesting if there was some acknowledgement of G-fee increases, which explain the reason why. 

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Michigan Hullabaloo

Posted on December 11, 2012 by ashot

Things have been a bit crazy up here in Michigan as Republicans are attempting to pass some right to work legislation. Obviously, Michigan has a long history with unions so this topic is even more contentious here than in many other states. The manner in which the bill is being passed (no committee meeting, public banned at one point, in the lame duck session) only fans the flames. Here are the basics and here is an article from Michigan State Senator Gretchen Whitmer. Keep an eye on her. I would not be surprised to see her run for Governor. Governor Snyder signing this bill has given her significant publicity and will motivate the Democratic base for the next election.

Getting less attention than the right to work legislation is piece of education legislation also being considered in the lame duck session. We have had several discussion at this blog regarding public schools, private schools, and the role of the government in education. Fortunately we have a diverse view on the subject and people, I’m thinking Kevin in particular, with some great knowledge in the subject area. With that said, I am interested in people’s thoughts on quite the hullaboloo that has arisen here in Michigan over a couple of laws being considered by the lame duck state legislature.

In short, the legislation would expand the Education Achievement Authority (EAA) to become a super-disctrict of underachieving schools (the bottom 5%). The two primary criticisms relate to the lack of oversight, the head of the EAA is not elected and reports only to the governor, and the absence of much evidence that the EAA improves things.

One of the interesing aspects of the debate is that the superintendents from some rather wealthy and successful districts are strongly opposed to the proposals. A couple have drated letters and various PTA organizations had a letter published in The Washington Post

Work is pretty busy, but I’ll try to keep an eye on comments to answer any Michigan specific questions.

Filed under: 2012, education | 2 Comments »