The NFIB’s chief economist said:

The sub-par recovery persists for the small business sector. Economic performance is contradictory — corporate profits are at record levels and the stock market hits new highs, yet GDP growth for the past six months has averaged about 1.5 percent and the unemployment rate is 7.5 percent. Nothing in the NFIB data suggests that the small business half of the economy is expanding other than by an amount driven by population growth and associated new business starts now in excess of terminations. The lack of leadership in Washington and the resulting uncertainty depresses consumers’ and business owners’ willingness to spend and invest, and make bets on the future.

More than 60% of business owners surveyed expect business conditions for the next six months to remain as they are or get worse. That represents an improvement of 13% over the March reading.

There was a bit of good news. For the fifth consecutive month, job growth was positive, even if by a very small amount. Earnings and wages remained unchanged, with 19% of owners reporting that employee compensation rose in April.

On a seasonally adjusted basis, 3% of business owners were able to raise prices, up from a net negative 1% in March. Over the next few months 21% of owners expect to raise their prices, also up from a March reading of 17%.

The biggest drags on independent businesses, according to the survey, were taxes (noted by 23% of respondents), regulations and red tape (21%) and poor sales (16%).

Nearly half of business owners either hired or tried to hire new employees in the past three months. More than three-quarters of the firms looking for employees reported few or no qualified applicants for the open positions, according to the NFIB.

The traditional answer to that problem is to increase wages, but that is not happening. Our guess is that small businesses are not hiring because they are not making sales. And they are not making sales because so many Americans are unemployed. It’s a nasty, if not vicious, circle.

A former SAC Capital, Jon Horvath, pleaded guilty to insider trading in September and has been cooperating with the investigations into SAC Capital and its affiliates.

Today’s settlement with SAC includes nearly $275 million in disgorgement, $52 million in interest payments, and another $275 million in penalties. The SEC’s acting director of enforcement said:

The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm.

Both settlements are subject to the approval of the federal district court.

Moody’s had initiated its review in September following McGraw-Hill’s announcement that it was selling its education division to Apollo Global Management LLC (NYSE: APO) for $2.5 billion.

But wait, there’s more. It is not just that Moody’s thinks that the sale of McGraw-Hill’s education division is a bad idea:

[McGraw-Hill also faces] heightened litigation risks in light of the recent civil lawsuits filed against McGraw-Hill and its subsidiary Standard & Poor’s Financial Services LLC (S&P) by the Department of Justice (DOJ) and various state attorneys general.

S&P’s defense against the DOJ charges is essentially, “Everybody was doing it.” That would include Moody’s of course. So far the Justice Department has taken no action against Moody’s or Fitch, but if, as S&P claims, everyone was rating mortgage-backed securities stuffed with subprime loans as golden, then it would seem that the DOJ would have figured that out already, and it is just a matter of time before enforcement actions are leveled against the other agencies.

And if everyone wasn’t doing it, as S&P claims, well that would be novel, to say the least.

McGraw-Hill’s shares are down about 0.3% in premarket trading this morning, at $44.86 in a 52-week range of $42.02 to $58.62.

Now, consider how that might apply to the ratings agencies like Moody’s Corp. (NYSE: MCO) or The McGraw-Hill Companies’ (NYSE: MHP) Standard & Poor’s or Fitch Ratings. Under their current modus operandi the agencies are paid by the bond issuers for ratings. We all know how that worked out, and S&P now faces a federal investigation related to its ratings of mortgage-backed securities prior to the real estate meltdown of 2007.

The logical thing would be for the ratings users to pay for those bond ratings, but the trick would be how to control the way the data gets disseminated. After all, if a brokerage pays for something, it would want to own it. And the bond brokers wouldn’t want to be saddled with bad ratings either because they couldn’t sell dicey bonds to savvy investors. Corporate bond issuers would hate this too.

How about having the federal government pay? Certainly the cost wouldn’t be nearly as high as the cost of propping up and bailing out the financial system. But, realistically, the philosophical and political issues with having the government pay for bond ratings has virtually no chance of gaining any traction.

The ratings system we’ve got — including the threat of federal prosecution — might be the best we can get. But do you really think Moody’s or S&P or Fitch is as trustworthy as Angie’s List? Really?

The index climbed to a high of of 23 in April 2012 but Gallup notes that prior to 2008, readings typically topped 100.

While owners’ view of current conditions fell 9 points, to -10, which suggests that business owners have become slightly pessimistic. The bigger change came in expectations, which fell from 18 in July to -1 in November. Gallup noted that 21% of small business owners expect job numbers to decrease, and one in three business owners expects capital spending to drop in the next 12 months.

Gallup summed up the latest survey:

Overall, the Wells Fargo/Gallup Small Business Index survey results suggest the U.S. economy is extremely fragile — and possibly susceptible to another recession. Policymakers need to keep this acute fragility in mind as Washington struggles to avert the “fiscal cliff.”

Paul Ausick

Estimated growth for 2013 remains high, at 11.1%, with S&P expecting growth in all sectors except telecommunications (down 0.75%) and utilities (down 1.84%). IT (up nearly 50%) and financials (up 23%) are expected to lead the 2013 upward charge.

Hurricane Sandy, which might cost up to $50 billion in damage repair, had only a slight impact on financial stocks. The damage estimate is half that related to Hurricane Katrina in 2005, and insured losses are now estimated at $10 billion to $20 billion, compared with $60 billion following Katrina. Sandy’s biggest impact could come in new claims for unemployment benefits, and rebuilding efforts later this year and into next could actually stimulate the economy.

On the approaching fiscal cliff, S&P has this to say:

[W]e worry that inaction in Washington, D.C. to resolve the fiscal cliff, combined with the short term impact from Sandy, could produce an unanticipated exogenous shock to the fragile U.S. economy. … From our perspective, the outlook for next year’s earnings now depends on the need for bipartisan fiscal compromise in Washington D.C., and the hope that QE3 can provide a healthier fundamental backdrop for the U.S. housing market and broad economy, if not in the immediate future, then sometime in the early months of 2013.

Paul Ausick

Other highlights from the survey:

• In the finance, insurance and real estate sector, 63% of respondents reported rising sales, while only 6% noted declining sales.
• More than half (58%) said profit margins were flat in the past three months, while 27% reported rising profits and 15% reported falling profits.
• About 20% reported price increases during the past three months, compared with just 9% reporting price increase in July.
• About two-thirds do not expect price changes in the current quarter, somewhat less than the 74% who did not expect price changes in July.
• Some 60% said that materials costs to their firms had not changed in the past three months, compared with 65% in the July survey.

The NABE noted that anxiety over the crisis in Europe has subsided somewhat, although the approaching fiscal cliff remains a “significant” concern.

Paul Ausick

A new survey by the U.S.-China Business Council indicates that 45 of 111 companies surveyed are less optimistic about the Chinese business environment than they were three years ago. Oddly, perhaps, 89% of U.S. businesses currently doing business in China reported that they made a profit in 2011 and two-thirds grew revenues by at least 10%, according to a report at Reuters.

Trade spats between China and the United States are common, with each side accusing the other of illegal subsidies or dumping or whatever. Just yesterday the U.S. House of Representatives urged U.S. companies to avoid doing business with two Chinese telecom firms, citing national security threats. Several U.S. solar panel makers have filed a dumping case against Chinese solar firms, and the U.S. has imposed tariffs on panels imported from China. The Chinese, of course, retaliated and are expected to retaliate for the telecom warning as well.

The biggest problem might be a U.S. refusal to label China a currency manipulator. The Obama administration has refused to slap that label on China, as have preceding administrations. Republican presidential candidate Mitt Romney has promised to label China a manipulator on his first day in office, should he be elected. And in one of those politics-make-strange-bedfellows moments, economist Paul Krugman, no friend of Republican politics, has long argued that China’s currency is deliberately undervalued and that the U.S. should take steps to force China to let its currency appreciate.

Another odd result from the Council’s survey is that currency issues did not even make the list of the top 25 issues that U.S. businesses have with China. The biggest challenge is “finding, hiring and retaining workers, followed by weak Chinese enforcement of intellectual property rights.”

Still, two-thirds of the survey respondents plan to increase their investments in China over the next 12 months, while just 17% have either delayed or cancelled new investment. Of those, half cited market access and investment barriers as the chief reasons for restraining investment.

Overall, U.S. businesses invested 20% less in China in the past year than they did the year before. The bloom is definitely off the rose.

Paul Ausick

The NFIB’s chief economist said:

Seasonally adjusted, 10 percent of the owners reported adding an average of 2.2 workers per firm over the past few months, and 14 percent reduced employment an average of 3 workers. The remaining 77 percent of owners made no net change in employment. Fifty-one (51) percent of the owners hired or tried to hire in the last three months and 41 percent (80 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.

The percent of owners reporting hard to fill job openings fell 1 point to 17 percent of all owners. Not seasonally adjusted, 10 percent plan to increase employment at their firm (down 3 points), and 11 percent plan reductions (up 2 points). Seasonally adjusted, the net percent of owners planning to create new jobs fell 6 points to four percent, a historically weak reading, especially in a recovery.

The only area of the country will positive job growth in September was the West North Central region, where energy production is booming and unemployment rates are much lower than the national average of 8.1%.

The NFIB’s September job report is scheduled for release on October 9th.

Paul Ausick

The NFIB’s chief economist said:

In spite of a terrible jobs report from the Labor Department and an increase in the number who view the current period as a terrible time to expand, small-business owners continue to show their resilience; last month they were even a bit more optimistic about improvements in real sales volumes and business conditions.

Small business owners did not add many new jobs in August — 78% reported no net change, while 12% reported adding an average of 2.7 employees and 10% reported cutting an average of 2.5 employees.

Fewer small business owners reported higher nominal sales, with 24% reporting higher sales and 29% reporting lower sales in August.

Citing the most recent University of Michigan/Reuters survey of consumer sentiment, the NFIB commented:

The survey shows only 12% of consumers think the government is doing a good job and 46% feel government is doing a bad job. And while the top ranked problem (out of 75) in the recently released NFIB Problems and Priorities survey was health insurance costs, the second and fourth ranked problems were “uncertainty about the economy” and “uncertainty about government policy.” This goes a long way toward explaining why spending seems to be in “maintenance mode.” With 50/50 odds in the polls, the president will be determined by the flip of a coin. The policy outcomes depending on who wins appear to be hugely different, and consequently, owners are not betting their hard earned money on the flip of a coin. They are waiting for more certainty about the direction of the economy and policy.

The NFIB press release is here and the full report is available here.

Paul Ausick