Small Business Economic Trends – July 2016


Embargoed August 9, 6am

 (Based on 1703 respondents to the July survey of a random sample of

NFIB’s member firms, surveyed through 7/28/16)



Chart data points are first month in each quarter, interim monthly survey results (smaller samples) are shown in blue.




The small business optimism index rose 0.1 points in July to 94.6.


The Index of Small Business Optimism increased 0.1 points to 94.6, still well below the 40 year average of 98.  Four of the 10 Index components posted a gain, four declined and two were unchanged.  Examining each component separately, a fairly clear pattern of “peaking” appears, with the Index and 7 components all reaching their recovery peak in January 2015 and three others peaking in April 2015.  Job openings did not peak until January 2016.  The peaks have become quite clearly defined and, absent very significant developments on issues that business owners have now incorporated in their expectations, there is little reason to expect reversals.  This is a strong indication that the recovery has “matured” and is now in its last phase.  Overall, it produced a relative long period of growth even if subpar.  Major distortions in the real economy were avoided, only the financial markets exhibited excitement and, it would seem, unsustainable growth thanks to Federal Reserve policy.


GDP growth in the last three quarters has averaged 1 percent, not a recession but only matching the growth in the population.  Hard to figure how the capital stock producing that output is valued at record high levels as reflected in the S&P 500 for example.  Maybe the Federal Reserve targeting asset prices with record low interest rates has something to do with that absurdity.  NFIB data also reveal another cause of subpar growth this expansion, a sluggish small business sector, historically half of private sector GDP.  Compared to the 1983 expansion following even higher unemployment rates, this recovery has been subpar in all dimensions, and particularly in job creation.  What hasn’t been subpar is  the growth in pages of regulation in the Congressional Record.


The outlook for business conditions six months from the current period continued to improve, gaining 16 percentage points since January but still in negative territory – more owners expecting deterioration than improvement.  Only 8 percent (seasonally adjusted) view the current period as favorable for business expansion, the average for this recovery but well below the 17 percent average for 2000-2007.  The political climate is the second most frequently cited reason that the current period is not a good time to expand at 36 percent, after weak sales and a bad economy. 




                                                                  JULY        Change            Share of 




































































[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 remained weak in July, with the seasonally adjusted average employment change per firm posting a decline of -0.03 workers per firm, although better than June’s -0.17 reading.  Ten percent (down 1 point) reported increasing employment an average of 3.8 workers per firm while 12 percent (down 1 point) reported reducing employment an average of 1.8 workers per firm (seasonally adjusted). 


Fifty-three percent reported hiring or trying to hire (down 3 points), but 46 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Fourteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem.  This issue ranks third out of nine major issues listed.



Twenty-six percent of all owners reported job openings they could not fill in the current period, down 3 points from, the highest reading in this recovery.  Thirteen percent reported using temporary workers, up 1 point.



A seasonally adjusted net 12 percent plan to create new jobs, up 1 point from June.  Not seasonally adjusted, 15 percent plan to increase employment at their firm (down 3 points and down 7 points from May), and 6 percent plan reductions (unchanged).  Owners in the West South Central appear ready to expand employment while those in the West North Central states remained the least inclined to create new jobs.  Plans to create new jobs were strongest in construction, followed by manufacturing and financial services.









Fifty-nine percent reported capital outlays, up 2 points from June.  Of those making expenditures, 37 percent reported spending on new equipment (down 4 points), 22 percent acquired vehicles (down 1 point and 4 points from May), and 13 percent improved or expanded facilities (down 1 point).  Five percent acquired new buildings or land for expansion (unchanged) and 11 percent spent money for new fixtures and furniture (down 2 points, 4 points from May).  The survey shows no strength in capital spending, consistent with reports from the Bureau of Economic Analysis on GDP.


The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 25 percent, a high reading in this expansion, but historically weak.  The small business sector remains in “maintenance mode”, spending will continue to stay in place, but not expand.  Of the 55 percent of owners who said it was not a good time to expand (up 2 points), 36 percent blamed the political climate, second only to economic conditions (45 percent) as a reason for not expanding.  Not seasonally adjusted, 10 percent expected an improvement in business conditions in six months (up 1 point), and 21 percent expected a deterioration (up 1 point). Seasonally adjusted, the net percent expecting better business conditions improved 4 percentage points to a net negative 5 percent, better but not a positive profile.  The seasonally adjusted net percent expecting higher real sales fell 1 point to 1 percent of all owners, a very weak showing.  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 fell 4 percentage points to a net negative 8 percent.  Seasonally unadjusted, 27 percent of all owners reported higher sales (up 2 points) and 26 percent reported lower sales (unchanged) quarter over quarter.  This series peaked in October 2014 at a negative 2 percent, with the exception of an unexpected and inconsistent reading of 2 percent in 2012 (see chart). Twelve percent cited weak sales as their top business problem, up 1 point from June. Overall, trends have been improving, becoming less “negative”, but not a sign of much strength as they remain in negative territory and appear to have peaked.  Strong consumer spending of over 4 percent growth did not improve reports of sales gains.



Unadjusted, 26 percent expect higher real sales volumes in the next three months (down 5 points, 9 points from May), while 23 percent expect reductions (up 1 point).  Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 1 point to a net 1 percent of owners, a weak showing.  Expectations for stronger real sales peaked in the quarterly surveys at a net 14 percent in January 2015 (19 percent in the December monthly survey), but have deteriorated substantially since the first quarter of 2015.







The net percent of owners reporting inventory increased 1 point to a net negative 5 percent (seasonally adjusted), on balance still reducing inventories as the GDP figures confirmed.  Inventory reductions took over 1 percentage point off the GDP growth reported at 1.2 percent.  In simple terms, GDP measures production in a particular quarter.  When cars are made in gthat quarter but not sold to a consumer, they are “sold” to inventory investment in the National Income Accounts and counted as GDP produced in that quarter.  When that inventory is sold in later quarters, inventories are reduced, but the money spent was not associated with production (GDP) in that quarter, so the spending does not add to GDP and inventories are reduced. Unadjusted, 13 percent reported an increase in inventory stocks (up 1 point) and 15 percent reported inventory reductions (up 1 point).  Stronger than expected consumer spending produced a sharp reduction in inventory stocks over the quarter.


The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 4 percent, more owners still found stocks to be excessive rather than lean. Sales expectations were not strong.  The net percent of owners planning to add to inventory increased 3 points to a net 0 percent, not a strong picture. 






Inflationary pressures remain dormant on Main Street.  Sixteen percent of owners reported reducing their average selling prices in the past three months (up 4 points), and 15 percent reported price increases (down 1 point).  Seasonally adjusted, the net percent of owners raising selling prices fell 4 points from June to a negative 2 percent.  In spite of the Federal Reserve’s efforts, inflation on Main Street is M.I.A.



Fifteen percent plan on raising average prices in the next few months (down 2 points) while only 3 percent plan reductions (unchanged), far fewer than will actually report reductions in August.  Seasonally adjusted, a net 14 percent plan price hikes (down 2 points).  Prospects for a resurgence of inflation are low, especially with gas prices on the decline again.





A sesonally adjusted net 24 percent of owners reported raising worker compensation, up 2 points from June but 2 points below May.  The net percent planning to increase compensation rose 1 point to a net 15 percent.  The survey does not distinguish between changes in wages and changes in benefits, including health insurance.  The strongest reading in this expansion occurred in January with 27 percent reporting higher employee compensation.  The lowest was a negative 2 percent in 2009, leaving this month’s reading among the best in the recovery. 


The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem fell 1 point to 14 percent, number three on the list of problems behind taxes, and regulations and red tape. Beyond the impact of mandates such as a higher minimum wage, this suggests continued pressure on compensation, as most firms seeking to hire report few or no qualified applicants.


Earnings trends worsened a point to a net negative 21 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 20 percent reported profits higher quarter to quarter (up 3 points), and 35 percent reported profits falling (down 1 point).  Gas prices are falling again, and once again providing a small cushion for the bottom line compared to past years.  At the macroeconomic level, corporate profits are showing weakness as well.







Three percent of owners reported that all their borrowing needs were not satisfied, 1 point above the record low reached in September 2015.  Thirty percent reported all credit needs met (down 2 points), and 53 percent explicitly said they did not want a loan, up 6 points.  However, including those who did not answer the question, presumably uninterested in borrowing, produces a 67 percent figure for the percent of owners having no interest in borrowing.  For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow.  Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes, 22 percent citing regulations and red tape, and 14 percent the availability of qualified labor.



Twenty-eight percent of all owners reported borrowing on a regular basis (down 1 point).  The average rate paid on short maturity loans rose 40 basis points to 5.3 percent.  Loan demand remains historically weak, owners can’t find many good reasons to borrow and invest. 


The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent, one point better than June.  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. 




After seven years of “recovery” which hasn’t turned out to be much of one, real GDP posted three quarters of growth averaging 1 percent, dragging down the average of 2.1 percent growth for the recovery period.  Compare this to 4.5 percent for the 1983 recovery.  At the tail end of this recovery, there are 5 million more food stamp recipients than at the start of the Obama administration.  There are 10 million more people on Medicaid.  The “work” requirement in the 1996 welfare reform legislation that worked well has been eliminated, perhaps explaining why so many owners with job openings for low skilled workers can’t find qualified applicants, welfare competes with actually taking a job.  If this is where the “recovery” ends, it will certainly be a sad performance.


Consumer sentiment went down (University of Michigan) but the most recent retail sales figures were promising, with better than 4 percent growth.  Consumer spending is critically important to small businesses.  Ford doesn’t sell cars, small business owners do and sales have recently been at a very high pace.  It appears that the consumer is totally responsible for second quarter growth and appears poised to keep spending in Q3.  However there is little hope of a good growth year at this point, as the business sector does not seem anxious to do a lot of investment spending or hiring.  Small business owners remain in “maintenance mode”.  A record high percentage of owners cited “the political climate” as the major reason for viewing the current period as a bad time to expand.  The surge in consumer spending was met by drawing down inventories, taking a point off of GDP growth.  A rebuild of inventories was not apparent in the NFIB numbers but if it happens, Q3 growth will get a boost.  Overall, growth will likely resume its 2 percent pace.








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.