Small Business Economic Trends – September, 2016


Embargoed October 11, 6am

 (Based on 723 respondents to the September survey of a random sample of

NFIB’s member firms, surveyed through 9/29/16)



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




The small business optimism index fell 0.3 points in September to 94.1.


The Index of Small Business Optimism fell 0.3 points to 94.1, another monthly decline, but still in the 94 range (the 40 year average is 98).  Four of the 10 Index components posted a gain, six declined.  There was a huge improvement in the outlook for business conditions, but rising only to a net 0 percent expecting improvement, not very positive.  Offsetting that gain were large losses in job openings, inventory satisfaction and plans for inventory investment.  No “juice” for a significant improvement in economic activity that many were hoping for after a very poor performance for the past 12 months.


It is quite clear that the top issues for owners will not be addressed this year.  Even if Congress, and the Senate in particular, were to pass significant legislative improvements in the tax code, or health care regulations, or EPA regulations, a veto stands in the way.  The Presidential election is so divisive that it offers little promise of a bipartisan effort to deal with tax reform or regulatory rule-making once a new management team is installed in Washington D.C.  This is a major source of uncertainty for business planners.  Fiscal policy, badly in need of an overhaul, will face similar challenges.  This leaves owners with the prospect of slow growth, driven mostly by population growth with little capital spending beyond “maintenance”.  





                                                              SEPTEMBER    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]


Uncertainty about the course of the economy and about government policies are ranked in the top ten problems in NFIB’s 2016 survey asking members to rank order 75 business issues.  Uncertainty prevents owners from taking actions to either take advantage of improving prospects and opportunities or deploying resources to minimize the impact of expected adverse events.  The inability to give even a directional forecast for business conditions, or real sales or conditions for business expansions “freezes” owners in place, depressing economic activity.





















Reported job creation remained weak in September with the seasonally adjusted average employment change per firm posting a gain of 0.01 workers per firm, up from -0.02 in August. Job creation has been basically flat for several months. Fourteen percent (up 3 points) reported increasing employment an average of 3.3 workers per firm while 11 percent (down 3 points) reported reducing employment an average of 1.9 workers per firm (seasonally adjusted). 


Fifty-eight percent reported hiring or trying to hire (up 2 points), 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.  Seventeen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem.   This issue ranks second behind taxes, tied with the cost of regulation and red tape.



Twenty-four percent of all owners reported job openings they could not fill in the current period, down 6 points from the high for this recovery.  This indicates an increase in the unemployment rate is likely. Thirty-one percent of construction firms and 29 percent of manufacturing firms reported openings.  Fifteen percent reported using temporary workers, unchanged.



A seasonally adjusted net 10 percent plan to create new jobs, up 1 point from August.  Not seasonally adjusted, 13 percent plan to increase employment at their firm (down 2 points), and 8 percent plan reductions (down 2 points).  Not a strong number for a recovery period.  Job creation plans collapsed in Retail and Construction but surged in Professional Services (health care?) and were strong in Manufacturing.  Regionally, job creation plans were weakest in the Mid-Atlantic, West North Central and Mountain states and strongest in New England and Pacific states.




Historically, the NFIB job openings data have been a strong predictor of the unemployment rate.  The decline in September was substantial, 6 percentage points, although from the recovery high reading.  This anticipates an increase in the unemployment rate, as job creation plans remained mediocre.  The NFIB model says 5.4% in the momths ahead, that would be quite a jump.  Reports of actual hiring were weak as well. 






Fifty-five percent reported capital outlays, down 2 points from August following a 2 point decline in July.  Of those making expenditures, 38 percent reported spending on new equipment (down 3 points), 22 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (down 1 point).  Six percent acquired new buildings or land for expansion (up 1 point) and 12 percent spent money for new fixtures and furniture (unchanged).  The percentage of owners making an outlay peaked in July 2015 at 61 percent, revisited that percentage in January but has faded since.



The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 27 percent, the second highest reading in the recovery, but historically weak.  The small business sector remains in “maintenance mode”.  Of the 57 percent of owners who said it was a bad time to expand, up 5 points, 35 percent blamed the political climate.  Not seasonally adjusted, 12 percent expected an improvement in business conditions in six months (up 4 points), and 17 percent expected a deterioration (down 9 points).  Seasonally adjusted, the net percent expecting better business conditions gained 12 percentage points to a net 0 percent, an improvement, but to a still poor reading.  The seasonally adjusted net percent expecting higher real sales rose 5 points to 4 percent of all owners, a very weak showing.  Clearly, expectations for the economy are not conducive to a meaningful improvement in business investment as prospects for sales and profits are poor.







The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 3 percentage points to a net negative 6 percent.  Seasonally unadjusted, 26 percent of all owners reported higher sales (unchanged) and 26 percent reported lower sales (unchanged).  Reports of stronger consumer spending in the government numbers did not improve reports of sales gains.




Unadjusted, 25 percent expect higher real sales volumes in the next three months (down 1 point), while 30 percent expect reductions (up 2 points).  Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 5 points to a net 4 percent of owners, a weak showing.  With weak sales prospects, hiring and inventory investment will be weak.






The net percent of owners reporting inventory gains fell 4 points to a net negative 4 percent (seasonally adjusted).   Unadjusted, 14 percent reported an increase in inventory stocks (up 1 point) and 17 percent reported inventory reductions (up 6 points).  Selling to customers out of inventory does not add to GDP.


The net percent of owners viewing current inventory stocks as “too low” deteriorated 5 points to a net negative 7 percent, indicating weak demand for new inventory spending.  The net percent of owners planning to add to inventory fell 8 points to a net negative 7 percent, not a strong picture. 






The lack of “inflation” on Main Street continues to contribute to the Fed’s frustration.  The net percent of owners raising average selling prices was a net negative 1 percent (down 4 points), this in contrast to a net 70 percent raising average prices in the 1970s.  Clearly the small business sector can produce “inflation”.  Fourteen percent of owners reported reducing their average selling prices in the past three months (unchanged), and 12 percent reported price increases (down 4 points). 


Nineteen percent plan on raising average prices in the next few months (up 2 points) while only 3 percent plan reductions (down 1 point).  Seasonally adjusted, a net 18 percent plan price hikes (up 3 points).  Good luck with that in this economy, growth is too low to put pressure on supply and produce price increases.





A seasonally adjusted net 22 percent of owners reported raising worker compensation, down 2 points.  The net percent planning to increase compensation was unchanged at 14 percent.  The survey does not distinguish between changes in wages and changes in benefits, including health insurance.  The strongest reading in this recovery 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.  Based on data from the St. Louis Federal Reserve Bank data base (Barry Ritholtz, Bloomberg View), since 1970 total compensation (benefits plus wages) is up over 60 percent while hourly wages are up 3 just percent.  Workers can’t be paid more than the value they bring to the company.  Mandatory increase in benefits crowd out take home pay, as we have pointed out for many years.


The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem rose 2 points to 17 percent, number 2 on the list of problems behind taxes, and tied with the cost of regulations and red tape.  This is the highest reading for this issue since late in 2007.  Beyond the impact of mandates such as a higher minimum wage and health insurance, this suggests continued pressure on compensation, as a growing number of firms seeking to hire report few or no qualified applicants.


Earnings trends improved 3 points to a net negative 20 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 18 percent reported profits higher quarter to quarter (unchanged), and 34 percent reported profits falling (unchanged).  The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor.






Six percent of owners reported that all their borrowing needs were not satisfied, up 2 points from August.  Thirty-two percent reported all credit needs met (up 3 points), and 49 percent explicitly said they did not want a loan, down 3 points.  However, including those who did not answer the question, presumably uninterested in borrowing, produces a 62 percent figure for the percent of owners having no interest in borrowing.  Record numbers of firms remain on the “credit sidelines”, seeing no good reason to borrow.  Only 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 17 percent citing regulations and red tape, and 17 percent the availability of qualified labor.



Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points).  The average rate paid on short maturity loans rose 100 basis points to 6.2 percent, a rather surprising development.  Overall, loan demand remains historically weak, owners can’t find many good reasons to borrow and invest, even with abundantly cheap money. 


The net percent of owners expecting credit conditions to ease in the coming months was a negative 7 percent, 2 points worse than August.  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. 




The Federal Reserve has started its usual “hide the rate hike” game, sending observers looking under every rock of data to see if there are 25 basis points underneath.  Most of the “rocks” look like pebbles, there’s not a lot of growth in the economy.  The Fed thinks it is the determining force shaping interest rates, not markets, a very troubling view.  One Fed president said "Long-run expectations for policy rates provide an anchor to long-run interest rates," continuing with "So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path."  E.G., if the Fed says it will keep short rates low, long rates will be low as well. 


Acknowledging that artificially keeping rates low is not easy, Fed chair Yellen said that if they run out of government bonds to buy, the Fed could start buying stocks and other uninsured bonds.  Taken to the limit, the Fed would own all quality financial assets that have a yield, leaving the private sector with cash.  The absurdity of this is obvious, yet the Fed talks about such policies as if they are a normal course of action.  The demand for riskless assets (our view of government debt until recent developments like Greece) is strong, the Fed is hoarding trillions of dollars of these assets and keeps buying them, and so yields stay low.  If the Fed returned these assets to the private sector (i.e. sold them back), interest rates would rise.  Fed policies have prompted firms to spend their resources on mergers and stock buybacks and dividends, not real investment.  And, with fiscal policy M.I.A., everything is on hold until the elections brings more clarity, good or bad.


Even more confusing is the Fed’s persistent belief that this is working, viewing their policies as supportive of growth rather than a major source of the uncertainty that blunts economic activity.  Clearly the stock market loves the Fed, but bloated stock values are not real productive wealth which is created by real investment in plant, equipment, research and infrastructure, weak in this recovery.  Even housing with low mortgage rates has not performed up to expectation based on demographics.  It has not occurred to the Fed that what meager growth we have had has occurred in spite of government policy, not because of it.  The private sector continues to push ahead regardless of the barriers that governments at all levels throw up in its path.




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.