Embargoed Tuesday, December 13 at 6 a.m.
(Based on 724 respondents to the November survey of a random sample of
NFIB’s member firms, surveyed through 11/28/16)
The small business optimism index improved 3.5 points in November to 98.4. The election results were a major disruptor.
The Index of Small Business Optimism rose 3.5 points to 98.4, a substantial gain to just above the 42-year average of 98. Eight of the 10 Index components posted a gain, one declined and one was unchanged. Expectations for real sales gains and outlook for business conditions accounted for 69 percent of the gain. The two employment components added 20 percent of the gain. The remaining six components were little changed.
[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]
Pre and Post-Election Results
However, the path leading to the 98.4 reading was not a straight line. Indeed, the November Index was basically unchanged from October’s reading up to the point of the election and then rose dramatically after the results were known. NFIB mails questionnaires to a random sample of its members on the first day of the month. Responses are returned over the 30 days following, permitting the separation of responses received before November 9 when the results became known and after.
Using responses received through election day, the Optimism Index rose only 0.5 points to 95.4, basically no change from October. Using post-election responses, the Index rose to 102.4, led higher by huge improvements in expected business conditions and expected real sales.
Job creation plans also jumped along with reports of improved earnings possibly due to sidelined customer spending responding to election euphoria. If viewed as a full monthly survey, the post-election improvement in earnings would be the strongest readings since early 2005. The sample sizes are small in the “before” and “after” samples (414 and 310, respectfully) but the differences are large enough to be statistically significant.
The December survey, now in the field, will make clearer whether the “after” results reflect temporary euphoria or a more permanent shift in expectations. Past research indicate that changes in expectations will, if maintained, translate into decisions to hire and make capital outlays.
Reported job creation remained weak in November with the seasonally adjusted average employment change per firm posting a gain of 0.02 workers per firm, positive, but barely. Twelve percent (down 1 point) reported increasing employment an average of 3.4 workers per firm and 13 percent (unchanged) reported reducing employment an average of 2.2 workers per firm (seasonally adjusted).
Fifty-eight percent reported hiring or trying to hire (up 3 points), but 52 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen 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 behind taxes, and the cost of regulatory compliance and red tape.
Thirty-one percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading in this recovery. The increase accurately predicted the decline in the unemployment rate from what many already call a “full employment” level. Sixteen percent reported using temporary workers, up 1 point.
A seasonally adjusted net 15 percent plan to create new jobs, up 5 points from October and the strongest reading in the recovery.
Overall, job creation should stabilize with the unemployment rate continuing to decline in the coming months. The major factors predicting the decline in the unemployment rate are showing solid numbers with job openings at recovery high levels and job creation plans up 5 points.
Fifty-five percent reported capital outlays, down 2 points from October and trending down on a quarterly basis. Of those making expenditures, 36 percent reported spending on new equipment (down 3 point), 25 percent acquired vehicles (up 3 points), and 15 percent improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (down 2 points) and 13 percent spent money for new fixtures and furniture (unchanged). 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 fell 3 points to 24 percent. The small business sector remains in “maintenance mode”. However, there was a substantial shift in expectations in the post-election data. Seasonally adjusted, the net percent expecting better business conditions rose 19 percentage points to a net 12 percent. The seasonally adjusted net percent expecting higher real sales rose 10 points to 11 percent of all owners, a very solid showing. Expectations for economic improvement and sales growth made significant gains, but plans for capital spending did not follow, declining after the election. It will take a “cooling off” period and some additional evidence on the economy to induce owners to convert their optimism into spending.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months deteriorated 1 percentage point to a net negative 8 percent. Reports of stronger consumer spending in the government numbers did not improve reports of sales gains.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 10 points to a net 11 percent of owners, a strong showing, but still historically quite weak.
The net percent of owners reporting inventory gains was unchanged at a net negative 3 percent (seasonally adjusted), typical of reports for 15 of the last 16 months.
The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 4 percent. With weak sales expectations, current inventory stocks appear more than adequate. Still, the net percent of owners planning to add to inventory improved 2 points to a net 4 percent, perhaps reflecting strong demand in some regions of the country.
The net percent of owners raising average selling prices was a net 5 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” given the opportunity to raise prices – strong growth in demand. Twelve percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 14 percent reported price increases (up 1 point).
Seasonally adjusted, a net 19 percent plan price hikes (up 4 points). The Federal Reserve wishes them success. Inflation requires an environment in which demand (spending) pushes against the ability of the economy to supply output. This does not describe most of the economy with the possible exception of housing where new construction seems to be lagging demand and hence, producing price increases, substantially in some markets.
COMPENSATION AND EARNINGS:
A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 4 points. The net percent planning to increase compensation dropped 4 points to 15 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.
The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem rose 1 point to 16 percent. Labor markets are tight, especially in construction, non-professional services and the wholesale trades. Beyond the impact of mandates such as a higher minimum wage, overtime pay and health insurance, the tighter labor market suggests continued pressure on compensation, as a growing number of firms report few or no qualified applicants.
Earnings trends improved 1 point to a net negative 20 percent reporting quarter on quarter profit improvements. 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, unchanged from October. Thirty percent reported all credit needs met (up 1 point), and 52 percent explicitly said they did not want a loan, down 1 point. However, including those who did not answer the question, presumably uninterested in borrowing, 66 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 19 percent citing taxes, 18 percent citing regulations and red tape, and 16 percent the availability of qualified labor.
Thirty-one percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 40 basis points to 5.6 percent. Overall, loan demand remains historically weak, owners can’t find many good reasons to borrow and invest, even with abundantly cheap money. If the positive expectations for real sales and business conditions observed after the election prevail in the coming months, this trend may start to reverse.
The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent. 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 LARGER PERSPECTIVE:
Many promises were made in the heat of the election, but delivering will, as always, be a challenge. Counting the Obamacare as a “regulation”, the roll back of the oppressive regulations including the EPA, OSHA, FLRB and the DOL are at the top of small business owner lists of concerns. Counting the Obamacare as a “tax”, tax issues account for six of the top ten owner concerns in NFIB’s 2016 Small Business Problems and Priorities survey. The 10th ranked problem was the shortage of “qualified labor”.
Much of the optimism of this survey is likely related to tax reform promises which would be great, but this must be much more than just a change in marginal tax rates, especially if the revenue implications of rate cuts are to be offset. With interest rates rising, Congress must become more sensitive to the budgetary costs of rising debt service, on the existing debt as well as on the new debt added by a budget deficit.
Federal Reserve policy might be impacted by the appointment of two new Governors of the Federal Reserve System. This could change the current hawks to doves voting balance on the FOMC. But new nominees must be approved by the Senate, so that is more likely to occur in the second half of 2017. Which of the current Governors choose to remain and serve out their terms remains to be seen. Any departures provide additional opportunities to change the composition of the FOMC which determines monetary policy. In the meantime, the Federal Reserve will raise rates in December.
Infrastructure spending was every candidate’s promise. The lags in implementing this type of stimulus are long. First, Congress must pass a spending bill. Then, the lucky recipients (governors and special project entities) will receive notice of funding. This stuff is not shovel ready, bids will go out, be processed, and awards made to contractors etc. Then these “on the ground” firms will begin to mobilize workers and equipment and materials for the projects, designers and engineers will go to work and eventually, a year or two or three (depending on the EPA and permitting) years later actual work will get underway, and show up in GDP. In terms of jobs, much of this work is capital intensive, not labor intensive (observe highway work, lots of big machines, a few workers). This is good stuff if well-done of course, but not an immediate cure for “weak demand”. Much of the infrastructure work needed is “state and local” in nature and city budgets have little room for funding such work after dealing with education costs and unions and welfare obligations. Lots of politics to get in the way.
There is much talk about “repatriating” billions of dollars in profits from foreign subsidiaries and the stimulus that spending that money would provide. Some crazy schemes have been proposed such as Allan Blinder’s idea to allow tax favored repatriation for each new job created at a firm. The firms that have these profits are capital intensive and don’t employ many workers and it is foolish to compel them to hire workers they can’t use in order to use their money. More to the point, the profits are made overseas and that is where demand is growing. The profits will be reinvested there to serve growing markets. Firms have plenty of capital here, but aren’t investing in plant and equipment. Instead, they are acquiring existing firms, buying back their shares and record high prices and paying dividends. That money will come back when we sensibly reform our tax code and undertake growth oriented policies which induce firms to expand their capacities here.
The question as to whether or not uncertainty, and political uncertainty in particular, matters was clearly answered by the November survey – it does! Owners clearly expect a different, and better from their perspective, set of economic policies to help the economy shed the growing number of obstacles of the last eight years in tax and regulatory policies that have depressed growth. This economy has grown in spite of, not because of, Obama’s economic policies. Population growth explains most, if not all, of our progress. The prospective impact of expected policy changes was translated into very positive views of economic activity which will translate into more spending and hiring if maintained.
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.