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 May 2018.
May 2018 Report: Small Business Optimism Index
Small Business Optimism Index Soars, Continuing Historic Run, Hitting Several Records in May
The Small Business Optimism Index increased in May to the second highest level in the NFIB survey’s 45-year history. The index rose to 107.8, a three-point gain, with small businesses reporting high numbers in several key areas including compensation, profits, and sales trends.
“Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase,” said NFIB President and CEO Juanita Duggan.
The May report hit several records:
• Compensation increases hit a 45-year high at a record net 35 percent.
• Positive earnings trends reached a survey high at a net three percent.
• Positive sales trends are at the highest level since 1995.
• Expansion plans are the most robust in survey history.
In another interesting marker, a net 19 percent of small business owners are planning price increases, the highest since 2008 and a signal of a strong economy. A net three percent reported positive profit trends, up four points and the best reading in the survey’s history. In addition, a net 15 percent reported higher nominal sales in the past three months, up an astonishing seven points and the sixth consecutive strong month for sales.
“Small business owners are continuing an 18-month streak of unprecedented optimism which is leading to more hiring and raising wages,” said NFIB Chief Economist Bill Dunkelberg. “While they continue to face challenges in hiring qualified workers, they now have more resources to commit to attracting candidates.”
Small business owners continue to hire with a seasonally-adjusted net 18 percent planning to create new jobs. Twenty-nine percent of owners have job openings for skilled workers, the third highest reading since 2000. Twelve percent have job openings for unskilled workers, with the strongest demand in the transportation, travel, communications, and utilities sector. To compete in the job market, 35 percent of owners reported increases in labor compensation to attract job applicants.
The percentage of owners reporting capital outlays moved up one point to 62 percent, with 47 percent reporting spending on new equipment, 24 percent acquiring vehicles, and 16 percent improving expanded facilities. Thirty percent plan capital outlays in the next few months.
Access to credit continues as a non-issue with 37 percent of owners reporting all credit needs were satisfied and 43 percent saying they were not interested in a loan, down seven points from last month and the lowest reading since 2007. Only one percent reported that financing was their top business problem. Owners planning to build inventories rose three points to a net four percent, the nineteenth positive reading in the past 20 months.
As reported in NFIB’s May jobs report, 23 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, followed by taxes at 17 percent and regulations at 13 percent. Fifty-eight percent reported hiring or trying to hire, up one point from last month but 83 percent of those reported few or no qualified workers.
Reports of employment gains remain strong among small businesses. Owners reported adding a net 0.20 workers per firm on average, slower than earlier in the year but strong. Sixteen percent (unchanged) reported increasing employment an average of 3.4 workers per firm and 8 percent (down 1 point) reported reducing employment an average of 3.2 workers per firm (seasonally adjusted). Fifty-eight percent reported hiring or trying to hire (up 1 point), but 48 percent (83 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), 1 point below the survey record high. Thirty-three percent of all owners reported job openings they could not fill in the current period, down 2 points but historically very high. Twenty-nine percent have openings for skilled workers, the third highest reading since 2000, with the two higher readings occurring in the last 12 months. Twelve percent have openings for unskilled workers, 4 points below the record high of 16 percent reached in March this year. Twelve percent reported using temporary workers, unchanged. A seasonally-adjusted net 18 percent plan to create new jobs, up 2 points from April and very strong.
SALES AND INVENTORIES
A net 15 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, up a humongous 7 points and the sixth consecutive strong month. Reports of sales gains were most frequent in manufacturing, transportation, and professional services. The net percent of owners expecting higher real sales volumes rose 10 points to a net 31 percent of owners. Owners will have to hire more employees and build inventory or miss out on potential sales.
The net percent of owners reporting inventory increases was unchanged net 4 percent (seasonally adjusted), extending a five month run of substantial inventory building (a boost to GDP growth) in anticipation of stronger real sales. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a negative 4 percent (a negative number means more think stocks are too high than too low). The net percent of owners planning to build inventories rose 3 points to a net 4 percent, the nineteenth positive reading in the past 20 months.
Sixty-two percent of owners reported capital outlays, up 1 point. Of those making expenditures, 47 percent reported spending on new equipment (up 4 points after 4 points in April), 24 percent acquired vehicles (down 3 points), and 16 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (down 2 points). Thirty percent plan capital outlays in the next few months, up 1 point. A shortage of “qualified” workers will encourage such investments in the longer run.
The net percent of owners raising average selling prices rose 5 points to a net 19 percent seasonally adjusted, resuming a march to higher average selling prices that started in the fourth quarter of 2016. The Federal Reserve’s target of 2 percent inflation (based on the headline PCE price deflator) has not been reached, but it is close. Seasonally adjusted, a net 26 percent plan price hikes (up 4 points). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices.
COMPENSATION AND EARNINGS
Reports of higher worker compensation pushed 2 points higher to a record net 35 percent of all firms. Plans to raise compensation fell 1 point to a net 20 percent, high but below its recent peak of 24 percent in January. Owners complain at record rates of labor quality issues, with 83 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Twenty-three percent (up 1 point) selected “finding qualified labor” as their top business problem, more than cited taxes, weak sales, or the cost of regulations as their top challenge. The frequency of reports of positive profit trends improved 4 percentage points to a net 3 percent reporting quarter on quarter profit improvements, the best reading in the survey’s 45 year history. Overall, the new tax law and the strong economy are very supportive of profit improvements.
Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty-seven percent reported all credit needs met (up 5 points) and 43 percent said they were not interested in a loan, down 7 points and the lowest reading since April 2007. If sustained, this will mark a shift from the borrowing sidelines that has plagued lending markets since the recession. Only 1 percent reported that financing was their top business problem compared to 17 percent citing taxes and 23 percent the availability of qualified labor. A net 5 percent reported loans “harder to get,” historically low. Thirty-four percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans was unchanged at 6.4 percent.
A vibrant democracy depends on a strong, free, private sector. The Administration and Congress have implemented important policy changes that strengthen the private sector. The new tax code is returning money to the private sector where history makes clear it will be better invested than by a government bureaucracy. Regulatory costs, as significant as taxes, are being reduced.
The private sector must not be deprived of its right to manage its economic affairs. History has proven that governments cannot deliver the success that a free economy can. There is much more work to be done. Rising healthcare costs have not been addressed and tax code complexity continues to burden small business owners, but we are on the right path.
These “big picture” developments are supporting a Main Street economy that is on fire. Hiring is proceeding as fast as labor supply issues allow, compensation is at record high levels, and capital spending the strongest in decades as owners feel it is once again a good time to expand their firms. Sales are historically strong and positive profit trends at the best level in the survey’s history. Accounting for about half of the economy, Main Street is definitely driving economic growth and employment to higher levels.