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 2016.
March 2017 Report: Small Business Optimism Index
Small Business Optimism Remains Near Record High
Small business owners continue to have high expectations for Washington
Small business optimism remained at one of its highest readings in 43 years, as small business awaits a new healthcare law, tax reform, and regulatory relief from Washington, according to the February National Federation of Independent Business (NFIB) Small Business Optimism Index, released today.
“It is clear from our data that optimism skyrocketed after the election because small business owners anticipated a change in policy,” said NFIB President and CEO Juanita Duggan. “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.”
The Index fell 0.6 points in February to 105.3 yet remains a very high reading. The slight decline follows the largest month-over-month increase in the survey’s history in December and another uptick in January. Three of the ten components increased, six declined modestly, and one was unchanged. Despite a small decrease, nearly half of owners expect better business conditions in the coming months.
“It is encouraging that the Index has persisted at 105 for three months in a row,” said NFIB Chief Economist Bill Dunkelberg. “Although optimism remains high, growth is still a problem because of restrictive government policies.”
The job openings component reached its highest level since December 2000, but more owners reported difficulty finding qualified workers to fill open positions. Dunkelberg said that the scarcity of qualified workers is pressuring owners to raise compensation to retain and attract good employees. Twenty-six percent of small business owners reported raising compensation, one of the highest readings since February 2007.
“Many small business owners are being squeezed by this historically tight labor market,” Dunkelberg said. “They are not confident enough to raise prices on consumers, which limits how much they can increase compensation and makes them less competitive in attracting qualified applicants.”
Business owners reporting higher sales improved four percentage points, rising to the first positive reading since early 2015. The percent of owners expecting higher real sales fell three points to a net 26 percent. This follows a 20-point rise in December and remains positive.
Capital spending among small business owners rose two points to 62 percent, the second highest reading since 2007. Owners reported spending on new equipment, vehicles, and improvement or expansion of facilities. The percent of owners planning capital outlays slipped one point to 26 percent. Duggan said after years of ball-and-chain regulation and poor economic growth, small businesses are ready to invest.
“Small businesses will begin to turn optimism into action when their two biggest priorities, healthcare and small business taxes, are addressed,” said Duggan. “To small business, these are both taxes that need reform. It is money out the door that strangles economic growth.”
Small business owners reported a seasonally adjusted average employment change per firm of 0.06 workers, just above the zero line but positive. Fourteen percent (up 1 point) reported increasing employment an average of 1.9 workers per firm and 10 percent (unchanged) reported reducing employment an average of 4.8 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 1 point), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Seventeen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points), revisiting the high for this recovery and the best reading since 2007. Thirty-two percent of all owners reported job openings they could not fill in the current period, up 1 point, the highest reading in this recovery. This is one of the tightest labor markets in the 43-year history of the NFIB survey. Twelve percent reported using temporary workers, down 1 point. A seasonally adjusted net 15 percent plan to create new jobs, down 3 points but still a very strong reading.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 4 percentage point to 2 percent, the first positive reading since early 2015. This measure has been positive in only six months since 2007, with the lowest recession reading of net negative 35 percent. Consumer optimism soared after the election and is lifting actual sales, but at a slow pace. Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 3 points to a net 26 percent of owners, this after a 20 point rise in December. This leaves expectations at very positive levels but not yet confirmed by actual improvements in sales trends.
The net percent of owners reporting inventory increases fell 2 points to a net 1 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. The net percent of owners viewing current inventory stocks as “too low” improved 3 points to a net negative 2 percent. The surge in expected sales gains should make some of these “excess stocks” look better. The net percent of owners planning to add to inventory rose 1 point to a net 3 percent – not strong, but positive.
Sixty-two percent reported capital outlays, up 3 points and the second highest reading since 2007. Of those making expenditures, 45 percent reported spending on new equipment (up 3 points), 26 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 3 points). Overall, a decent report on spending. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 26 percent, just shy of the highest reading in the recovery. Although these are high readings for the recovery, they are historically weak and have yet to reflect the optimism about sales and business conditions that occurred when President Trump was elected. 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 6 percent (up 1 point). Ten percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 16 percent reported price increases (up 1 point). 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 (down 1 point). 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 fell 4 points to 26 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. A recovery record 17 percent ranked “finding qualified labor” as their top business problem ahead of regulations, weak sales and insurance costs. Only taxes received more “votes” as the top problem. The inability of firms to raise prices limits the extent to which firms can raise worker compensation. But rising labor costs, due to shortages, or, more widely, to government regulations will continue to pressure the bottom line until demand is strong enough to support rising selling prices. Earnings trends deteriorated 1 point to a net negative 13 percent reporting quarter on quarter profit improvements.
Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point. Thirty percent reported all credit needs met (down 1 point), and 52 percent explicitly said they did not want a loan. However, including those who did not answer the question, uninterested in borrowing, 67 percent of owners have no interest in borrowing. Record numbers of firms remain on the “credit sidelines”, seeing no good reason to borrow yet, in spite of the surge in optimism. As optimism is translated into spending plans, borrowing activity should pick up. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 15 percent citing regulations and red tape, and 17 percent the availability of qualified labor. Weak sales garnered 12 percent of the vote.
Thirty-one percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans fell 30 basis points to 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 should 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 in March, but that will still leave money costs historically low. As owners’ confidence in the economy and economic policies rises, they will be more likely to convert their optimism into actual borrowing to support spending.
The latest government statistics on growth confirmed that, contrary to the claims of many economists, the new Administration has not inherited a “strong” economy. The 1.6 percent GDP for 2016 hardly ranks among our better growth periods and the last eight years have not been much better. Coming out of the recession, small business owners were greeted with a large tax bill, Obamacare, and a fizzled stimulus package that mostly preserved the jobs of government workers, rather than stimulating economic growth. An avalanche of regulations followed, all through the recovery period. The growth we experienced was definitely in spite of government policy, not because of it. The private sector is stubbornly persistent when it comes to growth, regardless of obstacles.
The Federal Reserve will raise rates another 25 basis points, but this still leaves interest rates historically low. The percent of owners reporting paying higher interest rates on their last loan jumped 7 points to 11 percent in January and held at 9 percent in February, after averaging less than 2 percent since the recovery started in 2009. The interest rate is one of the most important prices in the economy, allocating capital to its highest valued uses. Since 2009, there has been very little movement as Fed policy has paralyzed the functioning of interest rates. The sooner the Federal Reserve restores the role of interest rates, the healthier the economy will become.
Evidence on the economy is mixed, the New York Federal Reserve puts first quarter growth at 3.1 percent while the Atlanta Federal Reserve is looking for 1.8 percent. Both have access to the same data. Growth will make everyone, regardless of politics, feel better. However, the gulf between liberals and conservatives is large. The University of Michigan/Reuters poll in February illustrated this, with the Expectations Index at 55 among Democrats, 120 for Republicans and 89 for Independents. The Democrats expect the worst, the Republicans the best. Spontaneous positive references to economic policy were made by a record 28 percent of consumers, 26 percent made negative references. Reality will resolve the gap.