NFIB Small Business Economic Trends - December 2016

 

Embargoed Tuesday, January 10 at 6 a.m.

 

 (Based on 619 respondents to the December survey of a random sample of

NFIB’s member firms, surveyed through 12/28/16)

 

 

Overview

 

The Index of Small Business Optimism rose 7.4 points to 105.8, the highest reading since December, 2004 and looks much like the start of the impressive 1983-90 expansion. Seven of the 10 Index components posted a gain, 2 declined and 1 was unchanged. Expectations for real sales gains and outlook for business conditions accounted for 73 percent of the gain. The percent of owners viewing the current period as a good time to expand is now triple the average level in the recovery.  GDP related hiring and inventor investment showed little gain, but capital spending, the laggard in this recovery, posted a strong advance, both in reported outlays and plans for spending in the first half.  Job creation plans remained at the highest levels seen since 2007, reports of compensation gains were robust while reports of higher prices, though the highest all year, were infrequent.

 

 

 

 

 

 

Small Business Optimism and Ten Components

 

                                                              December    Change            Share of 

                                                                                                             Change 

CREATE NEW JOBS (net)

 

     16%

       +1

       1%

MAKE CAPITAL OUTLAYS

 

     29%

       +5

       6%

INCREASE INVENTORIES (net)

 

       4%

         0

       0%

JOB OPENINGS HARD TO FILL

 

     29%

        -2

      -3%

INVENTORIES TOO LOW (net)

 

     -3%

       +1

       1%

GOOD TIME TO EXPAND

 

     23%

     +12

     15%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

     50%

     +38

     48%

EXPECT HIGHER REAL SALES (net)

 

     31%

     +20

     25%

EXPECT EASIER CREDIT CONDITIONS (net)

 

      -6%

 

        -1

     -1%

EARNINGS TRENDS (net) POSITIVE

 

    -14%

       +6

      8%

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

  105.8

  

       +80

      +7.4

      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]

 

Pre and Post-Election Results

 

The December survey confirmed the euphoria observed in the post-election survey (November survey respondents after the election was announced).  The Optimism Index was 95.4 in the pre-announcement days of November, only half a point better than October.  After election results were announced, the Index jumped 7 points to 102.4 and then to 105.8 in December.  Consumer sentiment (University of Michigan) showed a similar response.  Averaging a reading of 91 for the first 10 months of 2016, it jumped to 93.7 in November and 98.2 in December, the highest reading since January, 2004.

 

Seventy-three percent of the gain in the Index was accounted for by more positive views about business conditions 6 months from December and improvements in real sales volumes.  Improved views about the climate for expansion added another 15 percent, so more optimistic expectations account for 88 percent of the improvement in Optimism, leaving little improvement in the other 7 components and more importantly in the measures directly related to economic growth. Job creation plans did improve a point (to a 9 year high), plans to increase inventory investment were unchanged.  But there was one piece of good news, capital spending plans going forward bumped up 5 percentage points.  Capital expenditures have been a real laggard in this recovery because the outlook for earning a decent return on the investment with low consumer sentiment and an avalanche of costly regulations and higher taxes was dim and with no prospect of improvement anytime soon.  Low interest rates did not overcome this handicap.

 

If this optimism continues, it will translated into spending plans (as in the case of capital spending plans in December) and ultimately into reports of actual hiring, inventory spending and capital outlays.  Trump has momentum, but maintaining it will be a challenge as the opposition regroups.

 

SEASONALLY ADJUSTED INDEX COMPONENTS

 

ANSWERED

 

OCT

BEFORE

  AFTER

 

NOV

DEC

JOB CREATION

10

9

23

 

15

16

JOB OPENINGS

28

31

30

 

31

29

EXPECT EASIER CREDIT

-6

-4

-5

 

-5

-6

EXPECT BUS COND BETTER

-7

-6

38

 

12

50

EXPECT HIGHER REAL SALES

1

4

20

 

11

31

EARNINGS TREND HIGHER

-21

-25

-16

 

-20

-14

INVENTORY TOO LOW (NET)

-4

-3

-6

 

-4

-3

PLAN TO INCREASE INVENTORY

2

4

4

 

4

4

GOOD TIME TO EXPAND

9

11

11

 

11

23

PLAN CAPITAL SPENDING

27

25

23

 

24

29

 

OPTIMISM INDEX

94.9

95.4

102.4

 

98.4

105.8

 

 

LABOR MARKETS

In spite of rising post-election optimism, reported job creation remained weak in December with the seasonally adjusted average employment change per firm posting a gain of 0.01 workers per firm, positive, but barely. Thirteen percent (up 1 point) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 4 points) reported reducing employment an average of 4.6 workers per firm (seasonally adjusted). 

 

Fifty-one percent reported hiring or trying to hire (down 7 points), but 44 percent (86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twelve percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (down 4 points). 

 

Twenty-nine percent of all owners reported job openings they could not fill in the current period, down 2 points, but from the highest reading in this recovery in November.  This indicates that labor markets remain tight. Eleven percent reported using temporary workers, down 5 points, a surprising drop.

 

 

A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and the strongest reading in the recovery.  Not seasonally adjusted, 17 percent plan to increase employment at their firm (unchanged), and 6 percent plan reductions (down 3 points).  Job creation plans were strongest in construction and the wholesale trades, weakest in retailing.  Regionally, job creation plans were strong in New England, the South Atlantic states and West South Central states.

 

 

Historically, the NFIB job openings data have been a strong predictor of the unemployment rate.  The unemployment rate is expeceted to remain steady or perhaps rise if higher consumer sentiment encourages more labor force participation.  High levels of job openings also suggest that job growth might be muted by hiring difficulties.  Planned hiring in the construction sector was very strong, but complaints of a lack of qualified workers is highest there

 

 

CAPITAL SPENDING

 

Sixty-three percent reported capital outlays, up 8 points from November and the highest reading in 2016.  Reports of expenditures tend to rise late in the year reflecting tax driven outlays (expensing), but this is a solid number even if weak compared to other expansions and is the second highest reading in the recovery. Of those making expenditures, 46 percent reported spending on new equipment (up 10 points), 23 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (unchanged).  Overall, a nice pickup in spending.

 

 

 

The percent of owners planning capital outlays in the next 3 to 6 months jumped 5 points to 29 percent, the highest reading since December, 2007, the peak of the last expansion (but well below the high readings in earlier years of 40 percent). Seasonally adjusted, the net percent expecting better business conditions rose 38 percentage points to a net 50 percent (after a 19 point gain in November). The seasonally adjusted net percent expecting higher real sales rose 20 points to 31 percent of all owners, after a ten point gain in November.  This optimism appears to be transitioning into strong spending plans as well as increases in actual outlays, a component of growth that was a laggard in the recovery.

 

 

SALES

 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 1 percentage point to a net negative 7 percent. The surge in consumer optimism didn’t produce a noticeable improvement in sales at small businesses, perhaps because of the growth of internet sales which might detract from their holiday business.

 

 

Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 20 points (after a 10 point rise in November) to a net 31 percent of owners, the highest reading since October 2005 with a reading of 40 percent. 

This remarkable improvement must be attributes to reduced “policy anxiety”, rising consumer sentiment, and the expectation that there really will be important cost relief from deregulation and tax reform, all of which is yet to be accomplished and has a hard political road to travel.  But the data indicate that business owners are indeed very optimistic, regardless of the basis for those views.

 

 

 

 

INVENTORIES:

 

The net percent of owners reporting inventory gains gained 6 points to a net 3 percent (seasonally adjusted), a rather strong report, as long as those inventories are built to meet rising consumer demand and not a result of weakening sales.

 

The net percent of owners viewing current inventory stocks as “too low” improved a point to a net negative 3 percent, still more feeling stocks are too high than too low. The surge in expected sales gains should make some of these “excess stocks” look OK.   The net percent of owners planning to add to inventory improved was unchanged a net 4 percent, a good number reflecting expected stronger demand.

 

 

INFLATION: 

 

The net percent of owners raising average selling prices was a net 6 percent (up 1 point) The net percent raising prices has been virtually 0 all year, but November and December presented opportunities for owners to raise prices a bit (the Federal Reserve will like this).   Eleven percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 13 percent reported price increases (down 1 point). 

 

 

 

 

Seasonally adjusted, a net 24 percent plan price hikes (up 5 points after a 4 point gain in November).  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, more price increases (7 percent recently), substantial in some markets. House prices are not included directly in the price indices, so inflation there must find its way to the inflation measures through rising rents and the “owner occupied rental equivalent” computation which accounts for 40 percent of the CPI for example.

 

 

COMPENSATION AND EARNINGS: 

 

Reports of increased compensation rose 5 points to 26 percent, the second best reading in 2016.  The market for “qualified” workers is clearly tight, as recovery high levels of owners categorize the lack of qualified workers as their top business problem.  However, owners are having little success in passing higher labor costs along to customers as the frequency of reported price hikes remained low in comparison.

 

 

 

 

Earnings trends improved 6 points to a net negative 14 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.  But rising labor costs, due to shortages, or more widely to government regulation (overtime pay, mandatory sick and family leave, Obamacare, higher minimum wages, etc.) will continue to pressure the bottom line until demand is strong enough to support rising selling prices.

 

 

 

CREDIT MARKETS:  

 

Four percent of owners reported that all their borrowing needs were not satisfied, unchanged over the past few months. Twenty-nine percent reported all credit needs met (down 1 point), and 52 percent explicitly said they did not want a loan.  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 yet, in spite of the surge in optimism. As optimism is translated into spending plans, borrowing activity should pick up.  Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 19 percent citing regulations and red tape, and 12 percent each the availability of qualified labor and weak sales.

 

 

 

 

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 6 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 “Trumpian surge” has yet to translate into spending plans to a significant degree.

 

 

 

 

 

THE LARGER PERSPECTIVE:

 

In a wealthy economy with substantial discretion over the allocation of resources, expectations and sentiment can trigger substantial changes in “macroeconomic activity”.  Some of our 300 million consumers can decide to spend a bit more if the future looks brighter.  A larger number of our 6 million employer firms could decide to hire another worker to meet higher expected demand or expand their businesses to handle expected increases in sales.   Just how much growth this can generate depends on the availability of unused capacity (in labor and production facilities and debt or capital funds).  No doubt we can do better than 2 percent and, for short periods, 3 to 4 percent growth.  Ultimately, job creation depends on economic growth, modified by the level of productivity of the growing sector. 

 

What is required is a sensible set of policies that do not squander our scarce resources.  Virtually every business owner can identify regulations that have little or no apparent value but have high compliance costs (using up scarce capital) and use up valuable management time.  Politicians say they want to create jobs but their regulations and laws passed only increase the cost of hiring a worker, and that is not good for job creation.  Economic policies designed to redistribute the pie don’t grow the pie, indeed they shrink it by building dependency among the citizens and some of our businesses that need the discipline of competition and the marketplace.  After the high unemployment period of 1980-82, the Regan administration met the challenge with a very different set of policies than the Obama administration in 2009.  The differences in those two recovery periods should provide  some insight into what policies the economy will respond to. 

                                                                                               

==========================================================

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.