Embargoed Tuesday, February 14 at 6 a.m.
(Based on 1874 respondents to the January survey of a random sample of
NFIB’s member firms, surveyed through 01/30/16)
The Index of Small Business Optimism rose 0.1 points to 105.9, the highest reading since December 2004, sustaining the remarkable surge in optimism that started post-election. Five of the 10 Index components posted a gain and 5 declined, but all by just a few points. After the stunning increases seen after the election, all of the Index components held near their record high levels. Job openings and job creation plans both posted small gains, confirmed by a huge increase in the net number of jobs added by the average firm, a gain subsequently confirmed by the BLS in its February jobs report. As “good feelings” are translated into actual hiring and spending, GDP growth should see an uptick. The inflation outlook remained stable, there was no surge in reports of higher selling prices.
Small Business Optimism Index and Ten Components
[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
Whether or not due to Trump’s election, the positive prospects of a change in the management team in Washington D.C., or both, small-business owners continued to be very optimistic about the economy since the election. The stunning improvements in the Index components that occurred after post-election were improved in December and confirmed in January. As these very positive expectations transition into spending and hiring plans, and then into actual reports of more spending and hiring, economic growth will begin to outperform 2016. Although the post-election surge in optimism looks much like the surge in 1983 which was followed by seven years of GDP growth averaging 4.5 percent, a similar growth surge is not likely this time around because of major differences in excess capacity available to absorb growing demand. Eight years of sub-par growth did reduce the buildup of excess capacity compared to 1983 when the economy was just emerging from the last recession that produced 10 percent unemployment rates. Economic policies in 1983 were more attuned to capitalizing on the excess capacity than the policies in place in 2009.
Post-election optimism appears to be translating into job creation with the seasonally adjusted average employment change per firm posting a gain of 0.15 workers per firm, the best reading since September 2015 and historically, a strong showing. Thirteen percent (unchanged) reported increasing employment an average of 2.8 workers per firm and 10 percent (up 1 point) reported reducing employment an average of 3.9 workers per firm (seasonally adjusted).
Fifty-three percent reported hiring or trying to hire (up 2 points), but 47 percent 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 (up 3 points).
Thirty-one percent of all owners reported job openings they could not fill in the current period, up 2 points, the highest reading in this recovery. This indicates rising demand for labor and a tightening labor market. Thirteen percent reported using temporary workers, up 2 points. A seasonally adjusted net 18 percent plan to create new jobs, up 2 points and the strongest reading since November 2006.
Fifty-nine percent reported capital outlays, down 4 points from December. 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. Of those making expenditures, 42 percent reported spending on new equipment (down 4 points after a 10 point increase in December), 28 percent acquired vehicles (up 5 points), and 16 percent improved or expanded facilities (down 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 13 percent spent money for new fixtures and furniture (unchanged). Overall, a decent report on spending.
The percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 27 percent, just below the highest reading in the recovery. Seasonally adjusted, the net percent expecting better business conditions fell 2 percentage points to a net 48 percent, still exceptionally optimistic. The seasonally adjusted net percent expecting higher real sales lost 2 points to 29 percent of all owners, but also a very strong reading. This is a positive environment to support conversion of these capital spending plans into real outlays.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 5 percentage points to a net negative 2 percent. This is the best reading since September 2015, and the third best reading since December 2014, but historically still weak. Consumer optimism soared after the election but this has yet to be translated into the positive sales report trends that typify an expansion period.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 2 points to a net 29 percent of owners, this after a 20 point rise in December. This leaves expectations at a very positive level but not yet confirmed by actual improvements in sales trends.
The net percent of owners reporting inventory increases was unchanged at 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” deteriorated 2 points to a net negative 5 percent, still more owners are feeling stocks are too high than too low. The surge in expected sales gains should make some of these “excess stocks” look better. The net percent of owners planning to add to inventory fell 2 points to a net 2 percent, positive, but not historically strong. Consumer spending will have to match the increase in consumer optimism to trigger more inventory investment.
The net percent of owners raising average selling prices was a net 5 percent (down 1 point). Eleven percent of owners reported reducing their average selling prices in the past three months (unchanged), and 15 percent reported price increases (up 2 points). The frequency of reported price hikes has ticked up since November, but not enough to produce a lot of inflation.
Seasonally adjusted, a net 21 percent plan price hikes (down 3 points). National price indices are creeping up but show no tendency to surge ahead. Some markets in which demand is pressing against supply are experiencing more rapid price increases including home prices and rents in many areas.
COMPENSATION AND EARNINGS:
Reports of increased compensation rose 4 points to 30 percent, the best reading since February 2007. Increasing numbers of owners are raising compensation to attract and retain the employees they need.
Earnings trends improved 2 points from December to a net negative 12 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, paid leave, Obamacare, higher minimum wages, etc.) will continue to pressure the bottom line until demand is strong enough to support rising selling prices.
Four percent of owners reported that all their borrowing needs were not satisfied, unchanged over the past few months. Thirty-one percent reported all credit needs met (up 2 points), and 52 percent explicitly said they did not want a loan. However, including those who did not answer the question, uninterested in borrowing, 65 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 15 percent the availability of qualified labor. Weak sales garnered 10 percent of the vote.
Thirty percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans rose 20 basis points to 5.7 percent. Overall, loan demand remains historically weak, even with cheap money. If the positive expectations for real sales and business conditions are translated into actual spending on capital equipment, expansion and inventory investment, borrowing activity should pick up.
The net percent of owners expecting credit conditions to ease in the coming months improved 3 points to a negative 3 percent. The Federal Reserve is expected to raise their rates several times this year, but that will still leave money costs historically low. As owners’ confidence in the economy and economic policies rises, they will be increasingly likely to convert their optimism into actual borrowing to support spending.
THE LARGER PERSPECTIVE:
Although many economists claim that President Trump is inheriting a “strong economy”, government statistics beg to differ. GDP grew only 1.9 percent in the fourth quarter of 2016 and an average of 1.6 percent for the entire year. This is the result of eight years of poor economic policies and gridlock in Congress. Congress now has the opportunity to undo harmful, anti-growth policies. For small-business owners, the success or failure to produce positive results will be reflected in future reports measuring small business optimism and their spending and hiring activity.
The January jobs report surprised pundits (and disappointed critics), coming in strong and well ahead of “consensus”. NFIB survey results anticipated the strong showing as their optimism gets translated into hiring action. Gains in expected sales require more workers to produce output and handle sales. The increase in labor force participation was a welcome sign, suggesting that labor markets are not as tight as the unemployment rate indicates (which went up) and that, as opportunities materialize and compensation rises, more workers will re-enter the labor force.
The Federal Reserve left interest rates unchanged in February’s meeting but sketched a more positive view of future economic developments. Most observers expect three rate hikes this year, which would still leave interest rates historically low. The percent of owners reporting paying higher interest rates on their last loan jumped 7 points to 11 percent, well above most readings since 2009 which were historically very flat. The interest rate is one of the most important prices in the economy, allocating capital to its highest valued uses. Since 2009, there has been very little movement as Federal Reserve policy has paralyzed the functioning of interest rates. The sooner the Federal Reserve restores the role of interest rates, the healthier the economy will become.
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.