(Based on 700 respondents to the MAY survey of a random sample of

NFIB’s member firms, surveyed through 5/26/16)


William Dunkelberg, Chief Economist (610) 209-2955 







The Index of Small Business Optimism increased 0.2 points to 93.8, positive but don’t start writing home about it. Four of the 10 Index components posted a gain, four declined and two were unchanged.  The entire gain in the Index was accounted for by a 5 point gain in Expected Business Conditions which remains 9 percentage points below last year’s reading.  The Fed remains reluctant to restore the Federal Funds interest rate to levels historically consistent with growth in the economy (as wimpy as it is).  And the Fed continues to reinvest its portfolio in longer term Treasuries and mortgage securities, keeping downward pressure on long term interest rates.


The political climate continued to be the second most frequently cited reason (after weak sales, a poor economy) for why the current period is a bad time to expand.  Seasonally unadjusted, 52 percent characterized the current period as a bad time to expand.  Only 11 percent thought the time was favorable for expansion. 


Although early signs of economic activity for Q2 are looking better, growth for Q1 was revised up to only 0.8% which is a very weak start for the year.  Consumer spending looks like it might add some more energy with consumer sentiment improving a bit in May, but capital spending, which declined at an annual rate of 6% in Q1, is not looking strong among NFIB firms and exports are not likely to grow by much if at all.  There are no inflation pressures coming from Main Street and no inventory investment.  More owners report sales trending down quarter over quarter than trending up.  At this point, it looks like more of the same slow growth for the rest of the year.



                                                                  MAY        Change             Share of 




























































  (1986 = 100)








 [Column 1 is the current reading, column 2 the change from the prior month, column 3 the percent of the total change in the Index accounted for by each component; “*” means the percent <0.5% or not a meaningful calculation.  Index is based to the average value in 1986, components are not.  The term “net” means that the percent of owners giving an unfavorable answer has been subtracted from the percent of owners giving a positive or favorable response.  For some questions, there is no “unfavorable” response category]





Reported job creation returned to positive territory in May, with the seasonally adjusted average employment change per firm posting a gain in employment of 0.03 workers per firm, not a lot, but positive.   Eleven percent (down 1 point) reported increasing employment an average of 3 workers per firm while 11 percent (down 2 points) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted). 


Fifty-six percent reported hiring or trying to hire (up 3 points), but 48 percent (86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Hiring activity increased substantially, but apparently the “failure rate” also rose as more owners found it hard to identify qualified applicants. Thirteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem, #4 on the Most Important Problem list.



Twenty-seven percent of all owners reported job openings they could not fill in the current period, down 2 points, but historically strong (see chart above).  Fifteen percent reported using temporary workers, up 2 points from April, 5 points from March.  Overall, it appears that labor markets are tightening.



A seasonally adjusted net 12 percent plan to create new jobs, up 1 point from March.  Not seasonally adjusted, 22 percent plan to increase employment at their firm (down 1 point), and 5 percent plan reductions (up 1 point).  Owners in the West South Central and West North Central states (the strip from Texas to North Dakota) were the least inclined to create new jobs.  The job creation parade was led by Construction, followed closely by Non-Professional and Professional Services (restaurants and hotels, and health care for example).








Fifty-eight percent reported capital outlays, down 2 points.  Of those making expenditures, 39 percent reported spending on new equipment (down 2 points), 26 percent acquired vehicles (up 1 point), and 15 percent improved or expanded facilities (unchanged).  Five percent acquired new buildings or land for expansion (unchanged) and 15 percent spent money for new fixtures and furniture (up 2 points). 


The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 23 percent.  Of the 52 percent of owners who said it was not a good time to expand (down 2 points), 29 percent blamed the political environment, second only to weak sales/bad economy (54%) as a reason for not expanding.  Not seasonally adjusted, 10 percent expected an improvement in business conditions in six months (unchanged), and 22 percent expected a deterioration (down 2 points). Seasonally adjusted, the net percent expecting better business conditions increased 5 percentage points to a net negative 13 percent.  The seasonally adjusted net percent expecting higher real sales was unchanged at 1 percent of all owners, not very strong.  Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment. 




The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months deteriorated 2 percentage points to a net negative 8 percent, a poor reading and reflective of weaker consumer spending in Q1.  Seasonally unadjusted, 22 percent of all owners reported higher sales (up 2 points) and 32 percent reported lower sales (down 1 point) quarter over quarter.  Fourteen percent cited weak sales as their top business problem, up 3 points from April. Overall, this is not a strong sales picture.




Unadjusted, 35 percent expect higher real sales volumes in the next three months (down 5 points), while 21 percent expect reductions (down 1 point).  Seasonally adjusted, the next percent of owners expecting higher real sales volumes was unchanged at a net 1 percent of owners, a weak showing.  This is well below the average 14 point reading in the first three months of 2015. 





The net percent of owners reporting inventory increases deteriorated 1 point to a net negative 6 percent (seasonally adjusted), a weak reading.  Unadjusted, 13 percent reported an increase in inventory stocks (up 1 point) and 16 percent reported inventory reductions (unchanged).  Although depletion of inventory stocks is generally a positive development if it is due to strong sales or a signal of future orders, neither is the case this time around. The net percent of owners viewing current inventory stocks as “too low” improved a point to a net negative 4 percent.  The net percent of owners planning to add to inventory decreased 1 point to a net negative 1 percent.  These weak inventory investment readings are consistent with the rather poor performance of consumer spending in the first quarter, leaving owners with excessive stocks and no incentive to add to them.






Gas prices are up 15 percent so far this year as oil prices rebound from very low levels.  However, this will not be sufficient to get the Fed’s preferred inflation measure over the 2 percent goal they have set.  Inflationary pressures remain dormant on Main Street.  Thirteen percent of owners reported reducing their average selling prices in the past three months (down 3 points from April and down 5 points from March), and 17 percent reported price increases (down 1 point).  Seasonally adjusted, the net percent of owners raising selling prices was up 2 points from April to 1 percent, after five months in negative territory, three of them at a negative 4 percent.  More evidence that the Fed’s policies aimed at producing inflation are not working. 

Eighteen percent plan on raising average prices in the next few months (down 2 points, 4 points since March) while only 3 percent plan reductions (unchanged), far fewer than actually report reductions. Seasonally adjusted, a net 16 percent plan price hikes (unchanged).  Prospects for a resurgence of inflation are low, and that’s a good thing (contrary to Fed efforts to create inflation).





A sesonally adjusted net 26 percent of owners reported raising worker compensation, up 2 points.  The net percent planning to increase compensation was unchanged at a net 15 percent.  The survey does not distinguish between changes in wages and changes in benefits, including health insurance.  Overall, the percent of owners reporting that they raised worker compensation remains high for this recovery while the net percent of owners raising prices remains near zero, indicating that these costs are not being passed on to customers. 


The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem rose a point to 13 percent, number 4 on the list of problems behind taxes, and regulations and red tape and weak sales. This indicates that employers will face continued wage and benefit cost pressure in order to attract and keep good employees.


Earnings trends deteriorated a point to a net negative 20 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 16 percent reported profits higher quarter to quarter (unchanged), and 38 percent reported profits falling (down 2 points).


Profits for the economy have been on a downward trend, 7 percent lower than a year ago although a bit higher in Q1 than Q4.  Firms have been cutting costs for some time and are running out of options to support profits from the cost side.  Revenue has grown slowly as reflected in the GDP reports.  Needed is an uptick in consumer and business spending, an event we have been needing for years.  And keep in mind that the profit measures include roughly $120 billion of “earnings” returned to the Treasury by the Fed.  Here’s how those fictitious earnings are created:  The Treasury sells a $1,000 bond to the public, the Fed buys the $1,000 bond from the public. The Treasury pays interest on the bond to the Fed, the Fed gives the interest back to the Treasury and this is called “profit”!  Nearly a third of the profits reported for the financial sector are accounted for by this return of interest payments to the Treasury by the Fed.






Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015. Thirty-one percent reported all credit needs met (unchanged), and 52 percent explicitly said they did not want a loan (65 percent including those who did not answer the question, presumably uninterested in borrowing). For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow.  Only 1 percent reported that financing was their top business problem compared to 23 percent citing taxes, 18 percent citing regulations and red tape, 14 percent weak sales and 13 percent the availability of qualified labor.  When credit is an issue, owners report it as illustrated by 37 percent reporting credit hard to get in the early 1980s compared to 5 percent today. 


Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged).  The average rate paid on short maturity loans fell 40 basis points to 5.3 percent.  Loan demand remains historically weak, owners can’t find many good reasons to borrow and invest when expectations for growth are dismal. 


The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent, unchanged from April.  Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending.  With 1 in 5 business owners expecting business conditions to deteriorate and 40 percent expecting no change from current conditions, prospects for an improvement in loan demand are not particularly good.




Federal Reserve Chair Yellen and her minions are now talking the financial markets into believing that a rate hike is in the offing.  According to market indicators, there was a 40 percent  probability for a June hike and a 60 percent probability for July, up from 4% before the campaign began. However, these estimates have changed in light of the most recent BLS numbers.  But the message is the same, rates will go up a whole 25 basis points IF the economic data support it.  Well, what does that tell us?  Nothing.  It’s obviously true, a tautology.  What we never know is which data and how good, quantitatively, must it look?  What exactly is “maximum employment”, what measures tell us we have arrived?  Maybe the leading indicator is how many Fed officials are making speeches with the line “rates will go up soon IF the data support it”.  Fed equivocating has been a major source of the growth-suppressing uncertainty that clouds private decision-making for the REAL economy, not financial markets.  When it happens, don’t expect the “needle” to move much.


Second quarter GDP growth is looking better, then again, 0.8 percent is not much of a hurdle to get over.  Preliminary forecasts from the NY and Atlanta Federal Reserve banks range from 2.9 to 2.2 percent growth from a weak Q1 base (Q4 was weak as well).  That would be a return to the “normal” sluggish growth for this expansion.  If this is the new “full employment”, it is easier to explain our weak real investment numbers, we still have excess capacity to deliver the goods and services consumers want (or can afford with slow pay growth), so a lot of potential new investment is not “profitable” to undertake.  Capital spending on Main Street has been subpar throughout the entire expansion and remains so.  There has been restrained borrowing and restrained capital spending.  The big firms are just repurchasing shares (at record high prices!).


A year ago, only 16 percent of consumers thought the government was doing a good job with economic policy (University of Michigan).  Now, 23 percent think so, an improvement of sorts, but nearly 40 percent characterize policy as poor, basically unchanged.  Early June survey results showed only 17 percent applauding current policy, a sharp decline.  The percentage expecting their finances to improve reached its highest point in 10 years.  Improved credit was supporting spending.  But expectations for economic growth weakened, a bit inconsistent.


Bottom line, we can’t get “3%” growth without an empowered small business sector and right now we don’t have one.  Obamacare, the avalanche of regulations (federal, state and local), taxes, and a management team in Washington that can’t get anything done insure mediocre growth which to a significant degree depends on population growth, not under the control of our politicians.




NFIB began surveys of its membership in October, 1973.  Surveys were conducted in the first month of each quarter through 1985 when monthly surveys were instituted.  The first month in each quarter is based on between 1,200 and 2,000 respondents, while the following two monthly surveys contain between 400 and 900 respondents.  The term “net percent” means that the percent of owners giving an unfavorable response has been subtracted from the percent giving a favorable response.  If, for example, 20 percent reported that they were going to increase the number of workers at the firm and 5 percent reported an intention to reduce the number of workers, the “net percent” would be 20 percent – 5 percent  or a net 15 percent planning to expand employment.  These figures are seasonally adjusted unless noted.  The graphs show quarterly data (first survey month in each quarter), updated when available by subsequent monthly surveys.