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Small Business Optimism Soars to Highest Level Since 2004

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 17, 2017

1. Small Business Optimism Index at Highest Level Since 2004

2. Small Businesses in Best Financial Shape Since Great Recession

3. Trump Spurs Optimism, But Regulatory Burdens Continue

4. Conclusions – Are We Getting Too Optimistic Too Early?

5. IBD: “Busting Five Big Myths About Obamacare’s Repeal”

Overview

Small businesses and entrepreneurs have had a rough time of it for these past eight years. New startups and entrepreneurial activity have pretty much been stagnant, weighed down by heavy regulation, high taxes and an economy that’s just been stumbling along. Yet in November and again December, there were signs of optimism and business renewal that could mark a real turnaround in the fortunes of small business.

The National Federation of Independent Business (NFIB) reported last week that its Small Business Optimism Index soared in December by the most in one month since 1980, a year when another maverick conservative-leaning candidate surprised everyone and won the presidency. His name was Ronald Reagan.

Another report out last week found that small businesses are now in the best financial shape since before the Great Recession based on revenues, cash-flows and sales.

While the economy is still far from healthy, we have seen more positive news since the election. Today we’ll look at these two latest reports on small businesses -- and what President Trump will, and will not, be able to do with regard to rolling back onerous regulations early-on in his administration.

Finally, we’ll look at an Investor’s Business Daily editorial last week that blows out of the water the liberals’ scare tactics when it comes to repealing Obamacare.

Small Business Optimism Index at Highest Level Since 2004

The Optimism Index climbed to 105.8 in December, matching its highest level since 2004, with a 38-point jump in the number of small business owners who “expect better business conditions” in 2017. Other indicators such as sales expectations and plans to expand also improved.

Small Business Optimism

“We haven’t seen numbers like this in a long time,” Small business is ready for a breakout, and that can only mean very good things for the U.S. economy,” said NFIB CEO Juanita Duggan.

The December results confirm the sharp increase that we reported immediately after the election,” said NFIB Chief Economist Bill Dunkelberg.  “This is the second consecutive month in which small business owners reported a much brighter outlook for the economy and higher expectations for their businesses.”

“In this month’s report, we are also finding evidence that higher optimism is leading to increased business activity, such as capital investment,” he added. Some 63% of NFIB members reported making capital outlays in December, a significant increase over November.

The other two big movers in the December survey, “Sales Expectations” and “Good Time to Expand,” jumped by 20 percentage points and 12 percentage points, respectively.

Small Businesses in Best Financial Shape Since Great Recession

According to the BizBuySell.com 2016 report, small businesses are now in their best financial shape since the financial crisis -- after years of hunkering down during the Obama administration. BizBuySell is the Internet’s largest business-for-sale marketplace. It reported that in 2016, median small business revenue rose 5.2% to $472,798, while cash-flow -- the main measure of small business financial viability -- rose a healthy 5.4% to $107,551.

BizBuySell also reported that the number of small business sold hit a new high with 7,842 closed transactions in 2016. It said the primary factors for the reported growth in transactions include an improving small business environment, more owners looking to sell, more qualified buyers in the market and better financing options. BizBuySell expects the number of small business transactions to continue to increase in 2017.

Trump Spurs Optimism, But Regulatory Burdens Continue

The last eight years have been challenging for small businesses. They were promised relief by President Obama, especially from burdensome healthcare costs. They got none – premiums soared. They were told the White House would listen to their concerns. They were met with near total indifference.

Instead, they had a record number of onerous federal regulations imposed on them -- Dodd-Frank’s punitive financial reforms, Obamacare’s taxes and higher income taxes that directly hit small business owners. President-elect Donald Trump has promised to correct many of these problems. That remains to be seen of course, but most small business owners are optimistic.

While this may prove to be true, it will not happen overnight, and there may well be some disappointment in the months ahead. As I have pointed out in recent weeks, there are only so many regulations that President Trump will be able to eliminate through Executive Orders in his first few months in office.

In addition, much of Trump’s agenda – including his proposed tax cuts which could really boost the economy – require congressional approval. It would seem to be a safe assumption that Trump will get zero support from Democrats on issues such as tax cuts and deregulation. There may even be some Republicans who are reluctant to fall in line, at least early-on.

The point is, most of what Trump wants to accomplish is going to take time.

Many people seem to think that Ford, Carrier, AliBaba, GM and other major companies that have announced plans to boost hiring and investment in the US will drive a booming recovery under Trump. Thus far, however, those announcements are not enough to have a serious impact on the economy.

As always, an economic boom depends on small businesses. Since 2009, small businesses have accounted for over 60% of all new jobs. Small businesses today make up just under half of private sector GDP. Without them, there would have been no recovery at all under Obama.

In short, when small business booms, the economy booms. If the US economy is really going to take off, small business is going to have to carry much of the load.

That’s a tall order. Most of us remember that the number of new business startups fell below the number of business deaths for a couple of years after the Great Recession. While that trend has thankfully reversed, it needs to continue.

Business Establishments

Some companies die. That’s a fact of economic life. So long as new businesses are being born, and the labor market is at least somewhat mobile, then these natural dynamics yield higher incomes and living standards. Promising new businesses reinvest capital and drive employment. Indeed, startup firms historically create the vast majority of net new jobs.

In the past decade, however, this source of dynamism has slowed. The ratio of startups in the US has been cut in half since the late 1970s. One in six companies were startups in 1970, whereas only one in 12 is a startup today.

Perhaps more important, the number of new jobs created annually by small businesses open one year or less collapsed from the peak of the dot.com bubble to the end of the Great Recession in 2009 – from 4.7 million to 2.5 million. It had only recovered to 3.0 million in 2015 (latest data available).

Jobs created

And it’s a chronic problem. Economists Glenn Hubbard and Tim Kane wrote this last year:

“Weak startup dynamism highlights a modern problem: Government is discouraging entrepreneurship. It’s passive, maybe even unintentional, but the institutional hostility to entrepreneurs is real. Financial regulation limits credit to entrepreneurs.

Politicians' assaults on open markets at home and abroad walls off potential profits. And labor markets have gotten rigid as more than one-in-three workers need a government license to work today, compared to 1-in-20 in the 1950s."

Conclusions – Are We Getting Too Optimistic Too Early?

Creating a small business boom will require more than just a jump in the NFIB Small Business Optimism Index. It will take a lot of things, including actions that will be fought bitterly by progressive Democrats, such as broad-based tax reform, an end to the death tax, the repeal of Obamacare, a pledge by Congress not to boost the minimum wage to a job-killing $15 an hour, full expensing of investments and sweeping regulatory reform to end Washington’s iron grip on America’s job creators and innovators.

Small business owners now think, for the first time in years, that conditions can change for the better. If so, the US economy could really take off. But as I continue to caution, the process is going to take time.

The only question is whether Congress will be smart and focused enough to move quickly on pro-growth economic legislation and hand it to Donald Trump to sign. If not, we could see a serious round of disappointment take over. With consumer spending accounting for apprx. 70% of GDP, that would not be good. I’ll keep on top of this in the weeks ahead.

*          *          *          *          *          *

The following editorial appeared in Investor’s Business Daily last Thursday:

“Busting Five Big Myths About Obamacare’s Repeal

Democrats are predicting doom and gloom if Republicans make good on their Obamacare repeal plans. Aren't these the same Democrats who promised that Obamacare would be a huge success?

Early Thursday morning, the Senate voted 51-48 for a budget resolution that marks the first step toward the repeal of Obamacare.

Democrats say repealing Obamacare will strip millions of Americans of insurance, leave people with pre-existing medical conditions unable to find coverage, increase the budget deficit, and be a political nightmare for Republicans.

Let's leave aside for a moment the fact that Democrats also promised Obamacare would let you keep your plan, lower health costs, grow more popular by the day, and that Republicans would pay a steep political price for opposing it.

The fact is that these dire forecasts are all based on big myths peddled by Democrats and the mainstream media.

•  It will add 20 million to uninsured rolls. This is the most pervasive myth of all, repeated ad nauseam in every news story about the law. There is no truth to it. The figure comes from the Obama administration itself, based on manipulated survey data. The Centers for Medicare and Medicaid Services — which runs Obamacare — says the number of uninsured declined by 15 million between 2013 and 2015 (the last year for which they have data).

The Census Bureau says it dropped by less than 13 million. The Heritage Foundation looked at actual enrollment data and found that just over 14 million gained coverage by the end of 2015. Not all of this decline is because of Obamacare, either, since millions of people got jobs over those years, many of whom gained coverage as well.

In any case, Republicans plan a transition away from Obamacare to reforms that will make insurance more competitive and more affordable, along with rules that will encourage young people to buy and maintain coverage. The 20 million claim is pure poppycock.

•  It will increase the deficit. Obamacare never did cut the deficit as promised, thanks to unilateral changes made to Obamacare by the administration that lowered revenues and increased costs. Since then, skyrocketing premiums and higher than expected costs for Medicaid are driving Obamacare costs higher. As we pointed out in this space recently, in the next decade Obamacare will, if left in place, add significantly to red ink.

•  It will increase health costs. Obama loves to claim that Obamacare led to a slowdown in health costs. Not true. The rate of increase in national spending on health care had been on a steady decline well before Obamacare became law. Obamacare reversed that trend once it went into full effect. The rate of increase in premiums for employer-provided insurance had also slowed before Obamacare took effect. The shift in the employer market toward Health Savings Account plans — which Democrats hate — is largely responsible for that.

•  Without Obamacare, people with pre-existing conditions won't get insurance. A Kaiser Family Foundation report says that 25% of U.S. adults could be uninsurable if Obamacare gets repealed because of pre-existing conditions. But that number is wildly inflated, since the vast majority of people get coverage through group plans or government-run programs that don't deny coverage based on pre-existing conditions. Plus, every Republican alternative to Obamacare includes some protections for those with serious health problems.

•  The public doesn't want Obamacare repealed. Whatever public opinion polls say — and keep in mind that these surveys are conducted by the same pollsters who failed to predict a Trump win —  the fact is that voters have effectively voted to repeal the law three times.

The first was when the GOP took control of the House in 2010, just months after Obama signed Obamacare into law, despite public opposition. The second was when voters handed control of the Senate to Republicans in 2014 after Obamacare’s disastrous launch and Obama's ‘keep your plan’ lie was exposed.

The third was when voters elected Donald Trump in the midst of skyrocketing premiums and skimpier health plans. In every case, Republican candidates who won elections emphatically and repeatedly vowed to repeal Obamacare if elected. If this isn't a mandate for repeal, it's hard to see what is.

The truth is that Democrats fear Obamacare’s repeal not because they worry about the harm it will do. They fear repeal because the GOP's free-market oriented replacement plan is likely to be far more popular and successful.” END QUOTE

The bottom line: Republicans should move rapidly and forcefully ahead with “Repeal and Replace.” They might actually find some Democrats who will get onboard with them!

All the best,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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