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 September 2020

Small Business Optimism Index

September 2020 Report:
Small Business Optimism Improves in September, Uncertainty Index Remains High


The NFIB Optimism Index rose 3.8 points to 104.0 in September, a historically high reading. Nine of the 10 Index components improved and one declined. The NFIB Uncertainty Index increased 2 points to 92, up from 75 in April.

“As parts of the country continue to open, small businesses are seeing some improvements in foot traffic and sales,” said NFIB Chief Economist Bill Dunkelberg. “However, some small businesses are still struggling financially to operate at full capacity while navigating state and local regulations and are uncertain about what will happen in the future.”

Other key findings include:

  • Earnings trends over the past 3 months improved 13 points to a net negative 12% reporting higher earnings.
  • Owners expecting better business conditions over the next 6 months improved 8 points to a net 32%.
  • Real sales expectations in the next 3 months increased 5 points to a net 8%.
  • Inventory investment plans over the next 3 to 6 months increased by 5 points to a net 11%.
  • The percent of owners thinking it’s a good time to expand increased 1 point to 13%.

Included in NFIB’s monthly jobs report, a net 23% (seasonally adjusted) of owners plan to create new jobs in the next 3 months, up 2 points from the August report and 22 points above April’s report. However, 36% (seasonally adjusted) of all owners reported job openings that they could not fill in the current period.

Fifty-three percent of owners reported capital outlays in the last 6 months, up 6 points from August. Of those making expenditures, 38% reported spending on new equipment (up 4 points), 23% acquired vehicles (up 2 points), and 16% improved or expanded facilities (down 4 points). Four percent acquired a new building or land for expansion (down 2 points) and 8% spent money on new fixtures and furniture (down 1 point).

A net negative 6% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, an improvement of 9 points from August but still below pre-crisis levels. The net percent of owners expecting higher real sales volumes increased 5 points to a net 8% of owners.

The net percent of owners reporting inventory increases rose 2 points to a net negative 7%, showing that more firms are reporting falling inventories than seeing stocks building. The net percent of owners viewing current inventory stocks as “too low” rose 2 points to 5%. Owners planning to expand inventory holdings increased 5 points from August to a net 11%, the highest reading since November 2004.  

The net percent of owners raising average selling prices rose 12 points to a net 13% (seasonally adjusted). Eleven percent of owners reported lower average selling prices and 23% reported higher average prices. Price hikes were the most frequent in wholesale (27% higher, 10% lower) and retail (27% higher, 7% lower). A net 17% (seasonally adjusted) plan price hikes.

A net 23% (seasonally adjusted) reported raising compensation, up 5 points from August. A net 16% of owners are planning to do so in the next three months. Nine percent of owners cited labor costs as their top business problem.

Twenty-one percent of owners cited “finding qualified labor” as their top business problem. Thirty percent in construction report finding qualified labor as their top issue and slowing new home production.

The frequency of reports of positive profit trends rose 13 points to a net negative 12% reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 51% blamed weak sales, 9% cited lower prices, 6% cited usual seasonal change, and 5% cited labor costs. For owners reporting higher profits, 73% credited sales volumes and 12% cited usual seasonal change.

Two percent of employers reported that all their borrowing needs were not satisfied, down one point. Thirty-three percent reported that all credit needs were met (up 2 points) and 55% said they were not interested in a loan. A net 2% reported their last loan was harder to obtain than in previous attempts. One percent of owners reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was negative 10%. Twenty-six percent of owners reported borrowing on a regular basis.

 

 

LABOR MARKETS 


Firms increased employment by 0.01 workers per firm on average over the past few months, basically unchanged from August. Ten percent (up 2 points) reported increasing employment an average of 3.2 workers per firm and 16 percent (down 4 points) reported reducing employment an average of 2.0 workers per firm (seasonally adjusted). Twenty-two million jobs were lost in the March-April period, half have been recouped to date, but the pace of improvement appears to be slowing. A seasonally-adjusted net 23 percent plan to create new jobs in the next three months, up 2 points from August, and 22 percentage points above April. Plans are back to levels observed in the first quarter when the economy was busy extending the longest expansion in history. Owners are now anticipating that the U.S. economy will continue to grow, and that they will need employees to produce and deliver the goods. Thirty-six percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 3 points. Thirty-two percent have openings for skilled workers (up 1 point) and 16 percent have openings for unskilled labor (up 4 points). Overall, 56 percent reported hiring or trying to hire in September, up four points from the previous month. Fifty percent (89 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill, up 4 points.

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CAPITAL SPENDING


Fifty-three percent reported capital outlays in the last 6 months, up 6 points from August. This is a major contribution to GDP growth but also to the improvement in future periods of worker productivity, the key to rising worker compensation. Still, the frequency of expenditures is 10 points below January levels. Of those making expenditures, 38 percent reported spending on new equipment (up 4 points), 23 percent acquired vehicles (up 2 points), and 16 percent improved or expanded facilities (down 4 points). Four percent acquired new buildings or land for expansion (down 2 points), and 8 percent spent money for new fixtures and furniture (down 1 point). Plans to make capital outlays continued to push toward pre-crisis levels. Twenty-eight percent plan capital outlays in the next few months, up 2 points from August.

COMPENSATION AND EARNINGS


Seasonally adjusted, a net 23 percent reported raising compensation (up 5 points) and a net 16 percent plan to do so in the coming months, up two points. Nine percent cited labor costs as their top business problem (unchanged). Twenty-one percent of the owners selected “finding qualified labor” as their top business problem (unchanged). The frequency of reports of positive profit trends rose 13 points to a net negative 12 percent reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 51 percent blamed weak sales, 9 percent cited lower prices, 6 percent cited usual seasonal change, and 5 percent cited labor costs. For owners reporting higher profits, 73 percent credited sales volumes and 12 percent cited usual seasonal change. Sales remain the major story.

CREDIT MARKETS 


Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Thirty-three percent reported all credit needs met (up 2 points) and 55 percent said they were not interested in a loan (up 2 points). A net 2 percent reported their last loan was harder to get than in previous attempts (up 1 point). One percent reported that financing was their top business problem (down 1 point). The net percent of owners reporting paying a higher rate on their most recent loan was negative 10 percent, down 5 points from August. Twenty-six percent of all owners reported borrowing on a regular basis (up 2 points). The average rate paid on short maturity loans was up 0.3 points at 5.1 percent. Loan rates have rarely been as low, and availability is not a major issue.

SALES AND INVENTORIES


As parts of the economy continue to open, small businesses continue to see improvements in foot traffic and sales. A net negative 6 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, an improvement of 9 points from August. The net percent of owners expecting higher real sales volumes increased 5 points to a net 8 percent of owners, a remarkable recovery. The net percent of owners reporting inventory increases rose 2 points to a net negative 7 percent, so substantially more firms report falling inventories than see stocks building. Consequently, the net percent of owners viewing current inventory stocks as “too low” continued to increase, rising 2 points to 5 percent, a record high. The net percent of owners planning to expand inventory holdings increased from August by 5 points to a net 11 percent, the highest reading since November 2004. Inventories are very low and need to be rebuilt to support even modest growth in the economy.

INFLATION


The net percent of owners raising average selling prices rose 12 points to a net 13 percent, seasonally adjusted, a significant increase but to a typical level of price raising activity. Unadjusted, 11 percent (down 5 points) reported lower average selling prices and 23 percent (up 7 points) reported higher average prices. Price hikes were most frequent in wholesale (27 percent higher, 10 percent lower) and retail (27 percent higher, 7 percent lower). Seasonally adjusted, a net 17 percent plan price hikes (up 1 point).

COMMENTARY


We are experiencing the shortest recession in modern history, starting in March or April and ending no later than September (official dates will eventually be determined by the National Bureau of Economic Research once more precise data are available). Housing is probably the hottest sector, posting record home sales last month and doubledigit price increases. More construction firms have unfilled job openings than in any other industry. Durable goods orders were strong except for aircraft, autos were weak after several strong months. Non-defense capital goods orders (excluding aircraft) were also very strong.

Inventories are very low compared to sales, more firms reported stocks too low than too high, a rare occurrence and good news for manufacturers and for GDP growth. The ratio of inventories to sales in retailing is at a record low level, spurring more production and imports to fill the gap. The inventory rebuild will add 4 or 5 percentage points to GDP growth estimated to be about 30 percent for third quarter over second (annual rate). And retail sales were up at a 50 percent annual rate in Q3 after falling 25 percent in Q2. Consumer sentiment rose dramatically in September and the $300/week unemployment supplement kicked in for some.

The ISM Services Index came in at 57 (above 50 is “expansion”), good news because small businesses dominate the service sector. The manufacturing sector is also looking very good, at 55. These measures indicate that growth is likely to be sold in the coming months, taking the economy closer to 2019 level of GDP growth this year.

The Federal Reserve continues onits quixotic search for inflation, determined to do whatever it can to create some. In addition to buying $80 billion per month in U.S. Treasury Bonds, $40 billion in mortgage backed securities, it is also lending money to the private sector. The Fed has succeeded in creating inflation in the asset market, stocks and bonds are at record high levels, but alas, no goods and services inflation. Home prices rose at double digit rates because demand for homes exceeds supply, the traditional cause of “inflation” (not directly included in our inflation measures). But no significant increase in the overall price level – no inflation.

On a broader level, the political climate is stressful and contributing to uncertainty. The presidential election is weeks away and voters have a choice of very different management teams. All that, in addition to a virus that has killed 200,0000 people to date with more to come. Stressful and confusing times. But these issues will be resolvedand the small business sector will continue to drive the economy forward.

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