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NFIB Powers Stocks, Treasury Yields

Posted by Joseph Trevisani on Jan 13, 2015 12:32:00 PM

Optimism is the ranks of small business owners reached its highest level since the financial crash and more said they plan to raise wages than at any time since the recession.

The Small Business Optimism Index rose to 100.4 in December, the best reading since 100.7 in October 2006, reported the National /Federation of Independent Business at 9:00 am today.

A net 17 percent of business managers said they planned to raise employee wages, an increase of 2 percentage points over November and the highest total since late 2007. 

Labor shortages may be forcing employers to increase compensation in order to find and retain workers. More businesses had already supplemented wages in December, 25 percent, than at any point in the past eight years. In November 21 percent had reported boosting salaries, the highest percentage since January 2008.

The Dow soared over 280 points on its open, the S&P 500 gained 28 points and the NASDAQ rose 80. All had retained the bulk of their early gains into early afternoon trading.

The yield on the 10-year Treasury was 1 point higher at 1.92 percent than yesterdays close at 12:30 pm, but it had returned 6 points from its intraday low of 1.86, which was the identical low of this benchmark bond on October 15 in the so-called flash crash.

Aside from the stop loss driven activity that day, today was the lowest for the 10-year yield since early May 2013. That was just before then Federal Reserve Chairman Ben Bernanke began publically speculating about ending the bank's quantitative easing program of Treasury purchases that had pushed the 10-year yield to a record low of 1.38 percent the previous July. 

Rising wages are seen by many analysts as the last component needed for the U.S. economy to complete its recovery from the financial crash, recession and slow economic growth of the past six years. 

As recently as June 2013 only a net 6 percent of respondents noted that they considered increasing employee compensation. 

The index of new hiring climbed to 15 percent in December from 11 percent the prior month and was the most buoyant since August 2007. 

Sales expectations jumped to 20 from 14 in November, capital spending plans improved to 29 from 25 and profits or actual earnings changes moved up to -15 from -17. Credit conditions eased, the timing of expansion plans rose, while prices and inventory were unchanged. 

The NFIB has been conducting this survey of 800 of its claimed 350,000 small and independent business members since 1974. It has long been considered one of the more reliable leading economic indicators as small business create the majority of new positons in the economy and are the first to retrench when economic conditions worsen. 

The compensation plans index quoted above at 17 for December had been a reliable indicator for the direction of wages, presaging falls in average hourly earnings and personal income (see chart below) in 2007 and 2008 and gains in 2010 and 2011. In 2012 and subsequently the correlation disappeared.  

The compensation index began 2012 at 6 and by the end of 2013 had more than doubled to 13 but wage growth in the period deteriorated.  

Annual personal income was expanding at 4.6 percent in January 2012 but by the end of 2013 that had slipped to -2.1 percent. Average hourly earnings were increasing at an annual rate of 1.7 percent in January 2012 and that had barely moved to 1.9 percent at the end of two years.

The divergence of these series has continued since with personal income rising at 4.2 percent annually in November 2014 and average hourly earnings dropping back at 1.7 percent in December while the compensation index rose to 17 at year end.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

nfib jan 13

indu jan 13

10 yr jan 13

compare jan 13

 

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