Small Businesses Become Increasingly Uncertain

Consumer Credit Increases

The consumer has deleveraged this cycle, so I don’t see it as a bad thing if the consumer takes out more revolving credit even though its savings rate is low. As you can see from the chart below, consumer credit growth was $17.1 billion in May which slightly beat estimates for $17 billion. The growth in April was $17.5 billion.

Revolving credit growth, which is credit card loans, increased from $7 billion to $7.2 billion. That’s a relatively strong 2-month reading. That might a big reason why consumption growth will improve in Q2 from Q1. In May annualized growth in revolving credit was 8.2% which was above April’s reading of 7.9%. Both signal the consumer being more aggressive. Action speaks louder than consumer sentiment surveys. It’s possible this means the May retail sales report will be revised higher.

Non-revolving credit growth, which is student loans and auto loans, was $9.9 billion which is a slight decline from $10.5 billion in April. Non-revolving credit growth is much steadier than revolving credit growth as car and student loan debt doesn’t have as much to do with small changes in consumer sentiment. It’s not as discretionary.

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Very Strong Redbook Growth

The June retail sales report comes out next Tuesday. The Redbook reports from June suggest retail sales growth will be solid. I’m expecting a slight pickup in yearly growth, but the results might be hindered by the threat of a Mexican trade war. If the Conference Board survey is right, growth will be modest; if the Bloomberg survey is right, growth will be fantastic.

The latest Redbook yearly same store sales growth report from the week of July 6th shows growth accelerated from 5.5% to 6.2%. That’s a very solid reading in the 4th of July holiday week. Any economists or investors looking for a recession sign here will be sorely disappointed. We could see weak Redbook sales growth near the end of the year because of tough comps, but that’s not something we need to worry about yet.

Another Solid Small Business Confidence Reading

The June small business optimism index fell from 105 to 103.3 which missed estimates for 104. This is still a very solid reading. The sequential weakness was caused by the burst in uncertainty probably related to the trade war. The uncertainty index increased 7 points to the highest level since March 2017.

As you can see from the image below, 6 of the 10 components fell from May and only 3 rose. There were 6 point declines in the indexes for whether now is a good time to expand, earnings trends, and the expectation for real sales to be higher. The net percentages fell to 34%, -7%, and 17%. The biggest increases were the 2 point gain in the net percentage expecting credit conditions to improve (up to -3%) and the 4 point gain in the net percentage seeing increased current inventory (up to 0). The credit availability index is at the highest reading since 2004. It’s up probably because financial conditions are placid. Higher inventories because of weak sales is a negative. Therefore, you can say this report had 7 negatives and 2 positives. Sales weakness combined with rising inventories show why earnings trends are expected to be negative.

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Solid JOLTS Report Shows Some Sequential Weakness

The JOLTS report was just like the NFIB sentiment reading in that the report was very good, but weakened from the previous month. As you can see from the chart below, the number of job openings fell from 7.372 million to 7.323 million in May which missed estimates for 7.4 million. The April reading was revised lower from 7.449 million. The number of job openings in May was only up 2.8% which is the weakest growth rate since May 2017. This is either cyclical weakness or a signal the labor market is almost full. This is about to be the 3rd slowdown of this expansion if it doesn’t end in a recession.

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The number of hires fell sharply from 5.991 million to 5.725 million. The April reading was the all-time record high going back to December 2000. Its yearly growth rate cratered to -2.3% from 5.2%. The previous slowdown’s low was -3.3%. It wouldn’t be a shock for growth to fall below that because the labor market is fuller. Excluding the initial recovery period, the lowest growth rate this cycle was -4.5% in May 2013. Of the 9 previous negative yearly growth rate readings in this expansion, 7 of them were followed by positive growth readings. That makes this month’s revision and the June report important. If growth is negative again, it’s a strong signal the labor market is starting to weaken.

The good news is the number of hires in April had a strong upward revision from 5.697 million. It’s easily possible that there will be another positive revision next month. The difference between the number of openings and hires increased from 1.381 million to 1.598 million in May. There’s no room to appreciate the amazing hiring revision because it’s old data and this report is already delayed by a month.

The quits rate stayed at 2.3% which matched the previous cycle’s high and is slightly below the record high of 2.5% in January 2001. The number of quits fell slightly from 3.516 million to 3.425 million. The quits rate at state and local education jobs hit 1% which is a record high. Based on the percentage of job leavers in the BLS report, the quits rate will hit a record high in June. We have a month to wait for that report to come out.

Conclusion

The latest economic reports on Tuesday showed sequential weakness as the JOLTS report showed a decline in hiring and the NFIB small business sentiment reading showed an increase in uncertainty. I’m interested to see if uncertainty wanes in the next report when small businesses get the knowledge that there are now negotiations between China and America on a possible trade deal. Nothing from these reports signal there is a recession afoot. The number of job openings and small business sentiment were still strong.