The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in March 2017.
March 2017 Report: Small Business Optimism Index
Small Business Optimism Sustained in March
A jump in the Uncertainty Index signals some uneasiness among small business, said the National Federation of Independent Business
The remarkable surge in small business optimism that began in November of last year was sustained in March, according to the National Federation of Independent Business (NFIB) Small Business Economic Trends Report, released today.
“Small business owners remain optimistic about the future of the economy and the direction of consumer confidence,” said NFIB President and CEO Juanita Duggan. “We are encouraged by signs that optimism is translating into economic activity, such as capital investment and job creation.”
The Index slipped 0.6 points in March to 104.7, still a very strong reading. Actual earnings, capital expenditure plans, and job-creation plans posted gains in March. Sales expectations, which have been flying high for months, dropped by 8 points, a sign that the Optimism Index could be moderating after a strong run.
“By historical standards, this is an excellent performance, with most of the components of the Index holding their gains,” said NFIB Chief Economist Bill Dunkelberg. “The increases in capital expenditure plans and actual earnings are signs of a healthier economy, and we expect job creation to pick up in future months.”
Dunkelberg noted that while the overall Index remained strong in March, a significant increase in the Uncertainty Index, a subset of data on how small business owners see the near-term future, could indicate trouble on the horizon.
“The Uncertainty Index hit 93 in March, which is the second highest reading in the survey’s history,” he said. “More small business owners are having a difficult time anticipating the factors that affect their businesses, especially government policy.”
Most of the March data were collected before Congress failed to pass a bill repealing and replacing Obamacare. A big reason for the soaring optimism of the past five months is the expectation among small business owners that Obamacare and other burdensome policies will be reversed by Congress and the new administration.
“The April data (due out in May) will tell us much more about how small business owners are processing the events in Washington,” said Duggan. “We know they have struggled under Obamacare, and that taxes are a major concern. Congress’s failure to keep its promises could dampen optimism, and that would ripple through the economy.”
Small business owners reported a seasonally adjusted average employment change per firm of 0.16 workers per firm, a solid showing. Twelve (down 2 points) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 4.3 workers per firm (seasonally adjusted).
Fifty-one percent reported hiring or trying to hire (down 1 point), but 45 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (down 1 point), far more than were concerned with weak sales.
Thirty percent of all owners reported job openings they could not fill in the current period, down 2 points but historically high. Thirteen percent reported using temporary workers, up 1 point.
A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and a very strong reading. Not seasonally adjusted, 27 percent plan to increase employment at their firm (up 3 points), and 3 percent plan reductions (unchanged).
The net percent of owners reporting inventory increases fell 1 point to a net 0 percent (seasonally adjusted), extending the accumulation reported in January. This will be positive for GDP growth, and will hopefully be absorbed by stronger spending rather than depressing future investment in inventory stocks. With sales growing, owners will need to bolster inventory stocks and this will add some fuel to GDP growth.
The net percent of owners viewing current inventory stocks as “too low” deteriorated 3 points to a net negative 5 percent, a surprise in light of the persistence of reported sales gains this year. The surge in expected sales gains earlier in the year should make some of these “excess stocks” look better, useful for meeting expected demand growth.
Nonetheless, the net percent of owners planning to add to inventory stayed positive, losing just 1 point to a net 2 percent.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 3 percentage point to 5 percent after a 4 point gain last month. Reports of positive sales gains have improved significantly since December. This measure has been positive in only 6 months since 2007 and as low as negative 35 percent.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 8 points to a net 18 percent of owners. This leaves expectations at very positive levels and now being confirmed by actual improvements in sales trends (above). Consumer confidence is at record levels, a good sign, and job growth has been solid, helping to support improvements in actual sales.
Sixty-four percent reported capital outlays, up 2 points over February and 5 points over January. Of those making expenditures, 46 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 2 points) and 16 percent spent money for new fixtures and furniture (unchanged). Overall, capital expenditures are trending up, fueled by expectations of better tax and regulatory treatment but also by “green shoots” (remember those?) on the ground with improved sales and consumer spending.
The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 29 percent, the highest reading in the recovery. That said, they are below levels that historically supported much higher levels of capital spending. Reports of actual outlays appear to be trending up, but still remain well below those observed in “good times”. Growth takes more than optimism, it takes more spending, at least rising to historically normal levels.
The net percent of owners raising average selling prices was a net 5 percent (down 1 point). Twelve percent of owners reported reducing their average selling prices in the past three months (up 2 points), and 19 percent reported price increases (up 3 points). The frequency of reported price hikes has ticked up since November, but not enough to produce a lot of inflation. Seasonally adjusted, a net 20 percent plan price hikes (unchanged). National price indices are creeping up but show no tendency to surge ahead. Some markets in which demand is pressing against supply are experiencing more rapid price increases. Both home prices and rents are rising much faster than the overall price indices.
Compensation and Earnings
Reports of increased compensation rose 2 points to 28 percent, one of the best readings since February 2007 but below the recovery record level reached in January. Owners complain at recovery record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A near-recovery record 16 percent ranked “finding qualified labor” as their top business problem, almost as many as cite the cost of reglatory compliance as their top challenge. Rising compensation will attract workers back into the labor force but it is a slow process.
Earnings trends improved 4 points to a net negative 9 percent reporting quarter on quarter profit improvements. The primary cause of earnings changes (up or down) was changes in sales, including “usual seasonal change”. The ability to raise prices received little credit for higher profits. The inability of firms to raise prices limits the extent to which firms can raise worker compensation and defend their bottom lines. But rising labor costs, due to shortages, or, more widely, to government regulation, will continue to pressure the bottom line until demand is strong enough to support rising selling prices.
Only 4 percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically low. Thirty-two percent reported all credit needs met (up 2 points), and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes, 17 percent citing regulations and red tape, and 16 percent the availability of qualified labor. Weak sales garnered 12 percent of the vote.
Thirty percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was unchanged at 5.4 percent. Overall, loan demand remains historically weak, even with cheap money. If the positive expectations for real sales and business conditions are translated into actual spending on capital equipment, expansion and inventory investment, borrowing activity will pick up.
The net percent of owners expecting credit conditions to ease in the coming months was unchanged at a negative 3 percent. The Federal Reserve is expected to raise rates several times this year, but that will leave rates historically low. Lenders will appreciate higher yields on loans, but loan rates will have little impact on the decisions of owners to “take the plunge” once economic conditions and policies change convincingly. Hopefully the Fed will give up control of interest rates to markets and not the whims of social engineers.
THE LARGER PERSPECTIVE
The surge in small business owner optimism was maintained in March, the fifth month of historically “off-the-charts” readings. Unfortunately, the expectation for economic growth is not off the charts. Official forecasts from the New York and Atlanta Federal Reserve Banks put first quarter growth at 0.9 percent or 2.9 percent as of March 31, hugely disparate estimates. Domestic spending, which excludes exports but includes imports will be a more important measure for small business owners. That should look better with consumer confidence surging, supported by solid job growth.
On the job side, the NFIB indicators are consistent with another low 200k job month. Hiring plans are strong and reports of past hiring solid. However, the inablity of owners to find applicants that can satisfactorily fill open positions will become more of a headwind to job growth. Rising wages will attract some new participants into the workforce, but owners will also have to undertake more training to fill specialized positions. For example, the skill mismatch is restricting growth in housing construction which, in turn, is producing rising home prices. A “manufacturing renaissance” will also require solutions to the skill shortage.
The Federal Reserve is indicating that it will raise rates several more times this year. Given the poor economic performance of 2016 prior to the last rate hike, one might wonder what, exactly, does “data dependent” mean. That said, expect the Federal Reserve to persist with a few more hikes, which will have little impact on lending activity and may enhance availability: loan committees are still troubled making longer term loans at rates we used to pay to depositors. Higher rates make it more comfortable.
In the meantime, we wait for the “fiscal policy shoe” to drop. But actual spending won’t show up until 2018, if all goes well. Retroactive tax rate changes might help later this year. In the meantime, the only engine for growth is going to be the private sector and its confidence in Washington, D.C’s new management team. Hopefully, it won’t be shaken too badly by political antics.