Small Business Economic Trends – October 2016


Embargoed November 8, 6am

 (Based on 1702 respondents to the October survey of a random sample of

NFIB’s member firms, surveyed through 10/28/16)





The small business optimism index improved 0.8 points in October to 94.9.


The Index of Small Business Optimism rose 0.8 points to 94.9, still in the 94 range that has bound it for the past five months and well below the 42 year average of 98.  It has been a below average recovery.  Five of the 10 Index components posted a gain, 3 declined and 2 were unchanged.  Expectations for real sales gains and for business conditions took one point off the Index, plans to add to inventories added a point.  THe employment components added half a point.  The improved Index, modest as it is, is consistent with the gain in Q3 GDP, best in a year but nothing to write home about. 


The fourth quarter though looks to be weaker withthe Uncertainty Index hitting a 42 year high, and as prospects for a “civil” relationship between the Democrats and the Republicans fade regardless of who wins the election.  The Uncertainty Index accumulates the frequency of “uncertain” or “don’t know” responses over six of the 10 Optimism Index components.  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.


The election turmoil is definitely having an impact.  Of those who think the current period is a bad time to expand substantially (56 percent), a record high 39 percent blame the political climate, second only to economic conditions.



Small Business Optimism and Ten Components


                                                               October    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 October with the seasonally adjusted average employment change per firm posting a loss of -0.06 workers per firm. Job creation has been basically flat for several months.  Thirteen percent (down 1 point) reported increasing employment an average of 3.4 workers per firm and 13 percent (up 2 points) reported reducing employment an average of 3.3 workers per firm (seasonally adjusted). 


Fifty-five percent reported hiring or trying to hire (down 3 points), but 48 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Fifteen 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 issue catagories behind taxes, and the cost of regulation and red tape.



Twenty-eight percent of all owners reported job openings they could not fill in the current period, up 4 points.  This indicates that labor markets remain tight and the unemployment rate will remain steady at what many call “full employment”. Fifteen percent reported using temporary workers, unchanged.



A seasonally adjusted net 10 percent plan to create new jobs, unchanged from September.  Not seasonally adjusted, 14 percent plan to increase employment at their firm (up 1 point), and 10 percent plan reductions (up 2 points).  Not a strong number for a recovery period.  Job creation plans were strongest in manufacturing and professional services.  Regionally, job creation plans were weakest in New England and on the west coast, a reversal of September figures.






Fifty-seven percent reported capital outlays, up 2 points from September but trending down on a quarterly basis.  Of those making expenditures, 39 percent reported spending on new equipment (up 1 point), 22 percent acquired vehicles (unchanged), and 16 percent improved or expanded facilities (up 1 point).  Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (up 1 point).  The percentage of owners making an outlay peaked for this recovery 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 was unchanged at 27 percent, the second highest reading in the recovery, but historically weak.  The small business sector remains in “maintenance mode”.    Not seasonally adjusted, 10 percent expected an improvement in business conditions in six months (down 2 points), and 22 percent expected a deterioration (up 5 points).  Seasonally adjusted, the net percent expecting better business conditions fell 7 percentage points to a net negative 7 percent.  The seasonally adjusted net percent expecting higher real sales fell 3 points 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 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 deteriorated 1 percentage point to a net negative 7 percent.  Seasonally unadjusted, 22 percent of all owners reported higher sales (down 4 points) and 26 percent reported lower sales (unchanged).  Reports of stronger consumer spending in the government numbers did not improve reports of sales gains.




Unadjusted, 22 percent expect higher real sales volumes in the next three months (down 3 points), while 35 percent expect reductions (up 5 points).  Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 3 points to a net 1 percent of owners, a weak showing.  With weak sales prospects, hiring and inventory investment will likely be weak going forward.






Owners apparently got rid of the inventory excesses that had exaggerated the already poor GDP figures from earlier in the year.  The net percent of owners reporting inventory gains rose 1 point to a net negative 3 percent (seasonally adjusted), still negative but better than the negative 4 point average for the 9 months prior.  Unadjusted, 13 percent reported an increase in inventory stocks (down 1 point) and 15 percent reported inventory reductions (down 2 points). 


The net percent of owners viewing current inventory stocks as “too low” improved 3 points to a net negative 4 percent, reflecting inventory reductions facilitated by stronger consumer spending in Q3.  The net percent of owners planning to add to inventory improved 9 points to a net 2 percent, a strong reversal.






The lack of “inflation” on Main Street continues to contribute to the Federal Reserve’s frustration.  The net percent of owners raising average selling prices was a net 2 percent (up 3 points), this is in contrast to a net 70 percent raising average prices in the 1970s.  Clearly the small business sector can produce “inflation”.  Thirteen percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 13 percent reported price increases (up 1 point). 



Seventeen percent plan on raising average prices in the next few months (down 2 points) while only 4 percent plan reductions (up 1 point).  Seasonally adjusted, a net 15 percent plan price hikes (down 3 points).  But for most small business owners, growth is too low to put enough pressure on supply to produce price increases, with the exception of new houses where supply is insufficient and prices are rising.





A seasonally adjusted net 25 percent of owners reported raising worker compensation, up 3 points.  The net percent planning to increase compensation rose 5 points to 19 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 a net 27 percent reporting higher employee compensation.  The lowest was a net negative 2 percent in 2009, leaving this month’s reading among the highest in the recovery. 


The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem fell 2 points to 15 percent, and ranks third on the list of problems behind taxes, and the cost of regulations and red tape.  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 report few or no qualified applicants.


Earnings trends deteriorated 1 point to a net negative 21 percent reporting quarter on quarter profit improvements.  Not seasonally adjusted, 16 percent reported profits higher quarter to quarter (down 2 points), 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.






Four percent of owners reported that all their borrowing needs were not satisfied, down 2 points from September.  Twenty-nine percent reported all credit needs met (down 3 points), and 53 percent explicitly said they did not want a loan, up 4 points.  However, including those who did not answer the question, presumably uninterested in borrowing, 67 percent of owners have no interest in borrowing.  Record numbers of firms remain on the “credit sidelines”, seeing no good reason to borrow.  Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 21 percent citing regulations and red tape, and 15 percent the availability of qualified labor.



Twenty-eight percent of all owners reported borrowing on a regular basis (down 4 points).  The average rate paid on short maturity loans fell 100 basis points to 5.2 percent, reversing last month’s 100 basis point increase (sampling error could be the culprit).  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 6 percent, up 1 point.  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 appreciably. 




The first guess at GDP growth for Q3 was 2.9 percent, a marked improvement over the prior four quarters.  But prospects for the fourth quarter are not promising, auto sales are weakening, housing supply is constrained, inventories are still a bit excessive, and consumer sentiment has been declining.  Businesses are not inclined to be investing in new plant and equipment, not knowing where already high marginal tax rates might go.


The Federal Reserve passed on a November rate hike as expected even though 9 of the 12 regional banks requested an increase and two FOMC members dissented.  The risk of a market disruption in the final week of voting for a president is one worth avoiding, delaying for 30 days won’t matter although delaying for eight years – that’s another matter.  The Fed’s monthly (morphing into yearly) delays have been a major source of uncertainty for owners and market participants as well. If the Fed gurus don’t know which way the economy is headed, who does?


The election is days away, and that will likely change the amount of uncertainty in the economy.  This will convert “uncertain” and “don’t know” views into firmer views, bad or good, and trigger actions to protect against anticipated policies or take advantage of the expected improvement in the economy.  While new uncertainties will likely emerge, the level of uncertainty should diminish.  Stay tuned for the November survey which will show the response to the election outcome.




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.