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 October 2018.
October 2018 Report: Small Business Optimism Index
Small Business Optimism Marks Two Years of Continued Historic Readings
Small business optimism continued its two-year streak of record highs, according to the NFIB Small Business Optimism Index October reading of 107.4. Overall, small businesses continue to support the three percent-plus growth of the economy and add significant numbers of new workers to the employment pool. Owners believe the current period is a good time to expand substantially, are planning to invest in more inventory, and are reporting high sales figures.
“For two years, small business owners have expressed record levels of optimism and are proving to be a driving force in this rapidly growing economy,” said NFIB President and CEO Juanita D. Duggan. “The October optimism index further validates that when small businesses get tax relief and are freed from regulatory shackles, they thrive and the whole economy prospers.”
Seasonally adjusted, 30 percent of owners think the current period is a good time to expand substantially, citing the economy (72 percent) and strong sales (14 percent). Nine percent of those who believe it is a good time to expand cited the political climate with 17 percent who believe it is a “bad time” to expand blaming politics. Although politics matter, the index indicates that economic factors, good or bad, are the main drivers of expansion decisions.
The net percent of owners planning to invest in more inventory rose two points to a net five percent, the 21st positive month since January 2017. This is due to the owners viewing current inventory stocks as “too low” falling to a net negative two percent, historically a very “tight” condition. A net eight percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from September.
“Thanks to a number of factors, including the federal government’s loosening grip on the private sector, the U.S. regained the top spot in the World Economic Forum’s ranking as the most competitive country during the month of October. An unburdened small business sector is truly great for employment and the general economy,” said NFIB Chief Economist Bill Dunkelberg. “October’s report sets the stage for solid economic and employment growth in the fourth quarter, while inflation and interest rates remain historically tame. Small businesses are moving the economy forward.”
Job creation remained solid in October for small businesses at a net addition of 0.15 workers per firm, as reported in last week’s NFIB monthly jobs report. However, 38 percent of all owners reported job openings they could not fill in the current period, equaling September’s record high. Sixty percent of owners reported hiring or trying to hire with 88 percent of them reporting few or no qualified applicants for the positions they were trying to fill. Thirty-four percent reported raising overall compensation in hopes of hiring and retaining needed employees, only three points off from September’s record high.
Job creation was solid in October at a net addition of 0.15 workers per firm (including those making no change in employment), unchanged from September. Sixteen percent (up 3 points) reported increasing employment an average of 3.3 workers per firm and 11 percent (unchanged) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). Sixty percent reported hiring or trying to hire (down 1 point), but 53 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (unchanged). Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), 2 points below the record high reached in August. Thirty-eight percent of all owners reported job openings they could not fill in the current period, equal to last month’s record high. Fourteen percent reported using temporary workers (unchanged). A seasonally adjusted net 22 percent plan to create new jobs, down 1 point from September. October’s reading is 4 points below August’s record high but exceptionally strong historically. However, with labor markets tight for both skilled and unskilled workers, it will be difficult to fulfill those plans. Thirty-four percent have openings for skilled workers and 16 percent have openings for unskilled labor.
SALES AND INVENTORIES
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from September. Over 30 percent of the owners in construction, manufacturing, retail, and the wholesale trades reported sales volumes gains. The net percent of owners expecting higher real sales volumes fell 1 point to a net 28 percent of owners, a very strong reading.
The net percent of owners reporting inventory increases fell 1 point to a net 4 percent (seasonally adjusted). Inventory investment has made a significant contribution to GDP growth in recent quarters, but customers continue to deplete stocks with strong spending. The net percent of owners viewing current inventory stocks as “too low” fell 1 point to a net negative 2 percent, historically a very “tight” condition. As a result, the net percent of owners planning to invest in more inventory rose 2 points to a net 5 percent, the 21st positive month since January 2017, a remarkable run.
Fifty-nine percent reported capital outlays, down 1 point from September. Of those making expenditures, 43 percent reported spending on new equipment (up 2 points), 26 percent acquired vehicles (unchanged), and 18 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (down 1 point) and 14 percent spent money for new fixtures and furniture (up 1 point). Thirty percent plan capital outlays in the next few months, unchanged, and among the few readings of 30 percent achieved since 2007, all in 2017 and 2018. Continued strong growth is using up capacity and owners need to replace and expand their capacity to meet the demand for their products and services.
The net percent of owners raising average selling prices rose 1 point to a net 16 percent seasonally adjusted. Twenty-nine percent of the construction firms reported raising prices (4 percent reduced) while 36 percent of the firms in agriculture report lower average prices (16 percent raised). Seasonally adjusted, a net 28 percent plan price hikes (a 4 point jump). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices. If the pace of price hikes (inflation) picks up, the Federal Reserve will find even more reason to hike rates in December.
COMPENSATION AND EARNINGS
In a string of strong compensation reading, reports of higher worker compensation fell 3 points from its record high to a net 34 percent of all firms. Plans to raise compensation fell 1 point to a net 23 percent. Compensation gains posted by small business owners are showing up in the government statistics on wage and compensation gains, which posted solid improvements. The frequency of reports of positive profit trends fell 2 points to a net negative 3 percent reporting quarter on quarter profit improvements, historically very high and continuing a streak of historically very favorable profit reports. For those reporting higher profits, 58 percent credited sales volumes, compared to 32 percent blaming sales for their profit declines. Six percent credited higher selling prices for profit gains, 10 percent of those reporting lower profits blamed weaker pricing power.
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged. Thirty percent reported all credit needs met (up 3 points) and 52 percent said they were not interested in a loan, down 1 point. Two percent reported that financing was their top business problem (down 1 point) compared to 23 percent the availability of qualified labor. Four percent (up 1 point) reported loans “harder to get”, historically very low. Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans fell 90 basis points to 6.4 percent. Overall, credit markets have been very supportive of growth and will not likely become an impediment for the next few quarters.
The U.S. regained the top spot in the World Economic Forum’s ranking of the most competitive country (out of 140), after losing that position with the advent of the regulatory onslaught of the previous Administration. Government agencies undertook rulemaking to replace legislation that could not pass in Congress. The courts ultimately imposed the ACA on small business. All this has changed as the federal government’s grip on the private sector has been, and continues to be, significantly reduced.
The employment picture is exceptionally good as small businesses hire or try to hire at record rates. Job gains have averaged 210,000 a month this year. Both hours worked and hourly wages rose in October, a good boost to incomes. The unemployment rate for individuals with less than a high school education is a shade over 5 percent, compared to a long term average of 9 percent. Earnings for this group are also growing faster than for those with higher educational attainment. Advanced degrees seeing the slowest growth. Owners report raising compensation at record rates, and this is apparently working, as the participation rate for prime working age individuals is rising in response to better pay and more widespread job availability. An unburdened small business sector is great for employment and the general economy.
Bottom line, the October report sets the stage for solid growth in the economy and in employment in the fourth quarter, while inflation and interest rates remain historically tame. Small businesses are moving the economy forward.