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 February 2015. A sample of 3,938 small business owners/members was drawn with 716 usable responses received for a response rate of 18%.
FEBRUARY 2015 Report:
Small Business Economic Trends
Small Business Optimism Rises Despite Falling Sales Trends
3rd highest reading since 2007
The NFIB Small Business Optimism Survey for February rose 0.1 points to 98.0 a solid result despite some unfavorable conditions.
“In spite of slow economic activity and awful weather in a lot of the country, small business owners are finding reasons to hire and spend which is great news. Of the ten components, owners reporting hard-to-fill job openings was the largest gain increasing three points to a 29 percent which is a nine year high.
“Large firms have been powering the economic recovery since the Great Recession, but that may be shifting to the small business sector. February’s data suggests there are fundamental domestic economic currents leading business owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output.” – Bill Dunkelberg, NFIB Chief Economist
The Index of Small Business Optimism gained 0.1 points to reach 98.0, the long-term average including the Great Recession and the third highest reading since early 2007. Only eclipsed by November and December 2014 which were a bit higher. Of the ten Index components, the largest gain was in the percent of owners reporting hard-to-fill openings (3 points). Changes were smaller in other components, 2 point increase for inventory investment plans, negative 2 points for job creation plans, and less for the other components. Overall, not a lot of movement in the overall Index or in the components.
Fifty-three percent reported hiring or trying to hire (up 5 points), but 47 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent reported using temporary workers, down 2 points. A net 12 percent planning to create new jobs, down 2 points but a solid reading. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006. Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months retreated 3 points, falling to a net negative 6 percent. After a 5 point decline in January, this indicator has returned to the low for 2014 reached in March of last year. Expected real sales volumes posted a 1 point decline, falling to a net 15 percent of owners expecting gains, after a 4 point decline in January. Sales prospects are still looking reasonably good to owners, just not as hot as in the fourth quarter last year.
The pace of inventory change remained positive, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from January. Owners are building inventory. This is the fourth non-negative month in a row, and the first string of positive numbers since early 2007. The net percent of owners viewing current inventory stocks as “too low” deteriorated 1 point to a net negative 2 percent, historically a fairly “satisfied” reading. The net percent of owners planning to add to inventory stocks rose 2 points to 4 percent, a very solid reading. If businesses accumulate inventory faster than spending rises in Q1, this will depress growth in 2015 Q2 if owners pull back on inventory investment.
Sixty percent reported outlays, up 1 point from January and the strongest reading since October 2007. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 26 percent, the third best reading for this expansion but still weak historically. Of the 43 percent of owners who said it was a bad time to expand, 23 percent still blamed the political environment (up 4 points). The net percent of owners expecting better business conditions in six months dropped 1 point to a net negative 1 percent. A net 15 percent of all owners expect improved real sales volumes, down 1 point after a 4 point decline in January. Still good readings for this expansion, but historically not so hot.
Seasonally adjusted, the net percent of owners raising selling prices was a net 0 percent, a very “tame” reading. There are no inflation pressures coming from Main Street. Seasonally adjusted, a net 19 percent plan price hikes (unchanged). A stronger economy will allow owners to actually realize their plans to raise prices, but so far, reports of actual price hikes and early indicators of first quarter economic activity suggest that markets will not yet support higher prices.
EARNINGS AND WAGES
Earnings trends were unchanged at a net negative 19 percent (net percent reporting quarter to quarter earnings trending higher or lower). After surging in December, reports of increased labor compensation dropped 5 percentage points to a net 20 percent of all owners. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. Four percent reported reduced worker compensation and 26 percent reported raising compensation. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (up 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations including the healthcare law.
Three percent of owners reported that all their credit needs were not met, holding at an historic low level. Thirty-three percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem (up 1 point).
Thirty percent of all owners reported borrowing on a regular basis, down 3 points. The average rate paid on short maturity loans fell 20 basis points to 5.1 percent. Loan demand remained historically weak. The improved optimism and plans to hire and spend over the past 4 months have not triggered a surge in owners’ willingness to borrow and make a bet on the future. The net percent of owners expecting credit conditions to ease in the coming months was a negative 4 percent, a 1 point improvement.
The economy lost a lot of momentum in the fourth quarter, with GDP growth now estimated at 2.2 percent (up 2.4 percent for the year) after strong second and third quarter performances. Imports grew substantially, accompanying the huge decline in oil prices. The reduction in oil prices was a great tax cut for the economy, granted by the private sector. Gasoline prices plunged, although recently they have risen steadily, adversely impacting consumer sentiment, mostly due to problems with refining capacity. But gas prices remain much lower than year ago levels, continuing to feed consumer spending and saving.
Historically the small business sector produces about half the private GDP and employs half of the private sector workforce. During the recovery, this sector did not pull its historic weight, slowing the recovery in employment substantially. In the boom, not only were too many houses built but too many firms were started, and filled with inventories to satisfy consumer spending driven by a 2 percent saving rate. Huge numbers of firms and their jobs were lost in the recession, nearly 900,000 establishments in each of the years 2008 and 2009. The NFIB data suggest that the surviving firms are regaining stride and the BLS data now show more starts than terminations, supporting job growth.
NFIB indicators of job creation have anticipated the relatively more favorable numbers reported by BLS. Owners are finding reasons to hire even though the “macro” indicators are not showing a lot of growth. Labor markets are tightening as the percent of owners reporting unfilled openings (BLS) has risen significantly and is now the highest reading since 2001. And the percent of owners citing the availability of qualified workers as their top business problem is at the highest level since December 2007, just ahead of the peak in employment in that expansion. There are fundamental domestic economic currents leading owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output.