Optimism rose again in October to 91.7, but remains stuck in the recession zone established over the past two years, not a good reading even with a 2.7 point improvement over September. This is still a recession level reading based on Index values since 1973. However, job creation plans did turn positive and job reductions ceased. The mood for inventory investment weakened a bit even though views of inventory adequacy improved, and an improvement in sales trends produced a marked improvement in profit trends, still ugly, but less so by a significant amount.
Well, not much has changed. The Index remains at recession levels where it has been for two years. Few owners expect business conditions to improve, few expect real sales to rise, more plan to cut inventories than to order more, and capital spending plans and actual expenditures remain at recession levels. However, there are a few specks of good news. Firms appear to have stopped reducing employment, but few plan to create new jobs. Inventory levels are viewed as balanced, but more owners still continue to reduce stocks than build them and more plan cuts than additions. Interest rates are low, yes, but there is little motivation to borrow even cheap money since there are few uses that promise a return on their investment. Most owners (75 percent) feel it is not a good time to expand their firms (20 percent are uncertain), 1 in 5 of them blame the uncertain political environment as the primary factor explaining their views.
The NFIB makes is very clear they do not like QE 2 by the Fed because it will do nothing to help the real economy.
And if that we’re enough, the day after the election, the Federal Reserve embarked on a highly doubtful policy course to expand its balance sheet to near $3 trillion by buying more Treasury bonds. Just how much spending will be stirred by, say, a quarter point reduction in rates is also unclear, but the presumption by most is “not much”. With historically low rates, who hasn’t already refinanced or bought a house that has the interest and ability to do so? The Federal Reserve also seems to have forgotten that thousands of smaller banks that don’t have access to “cheap money” have established floors on loans and Federal Reserve action is unlikely to push through them, especially since most market participants expect rates to eventually go higher. With over a trillion dollars of excess reserves now being held for banks at the Federal Reserve, it is hard to see the 2nd round of quantitative easing “QE2” doing much other than adding to those excess reserves. If the current trillion in excess reserves can’t be lent out, what’s the banking system to do with another half trillion?