NFIB Small Business Economic Trends - February 2017

 

Embargoed Tuesday, March 14 at 6 a.m.

 

 (Based on 764 respondents to the February survey of a random sample of

NFIB’s member firms, surveyed through 02/27/17)

 

 

Overview

 

The Index of Small Business Optimism fell 0.6 points to 105.3, sustaining the remarkable surge in optimism that started November 9, 2016. Three of the 10 Index components posted a gain, 6 declined, all by just a few points, and one was unchanged.  It is encouraging that the Index has held at 105 for three months now, and not faded.  Monthly data were not available in the 1983 recovery for comparison when the record Index reading was last reached.   Optimism has not faded, but the enthusiasm has yet to be translated into an equally impressive increase in spending and hiring.  This will require progress on the agenda that business owners voted for.

 

 

Small Business Optimism and Ten Components

 

                                                              December    Change            Share of 

                                                                                                             Change 

CREATE NEW JOBS (net)

 

 

     15%

       -3

       *%

MAKE CAPITAL OUTLAYS

 

 

     26%

       -1

       *%

INCREASE INVENTORIES (net)

 

 

       3%

      +1

       *%

JOB OPENINGS HARD TO FILL

 

 

     32%

      +1

       *%

INVENTORIES TOO LOW (net)

 

 

      -2%

      +3

       *%

GOOD TIME TO EXPAND

 

 

     22%

       -3

       *%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

 

     47%

       -1

       *%

EXPECT HIGHER REAL SALES (net)

 

 

     26%

       -3

        *%

EXPECT EASIER CREDIT CONDITIONS (net)

 

 

      -3%

 

        0

        *%

EARNINGS TRENDS POSITIVE (net)

 

 

    -13%

       -1

         *%

 

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

 

  105.3

  

       -7

     -0.6

      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]

 

 

LABOR MARKETS

 

 

 

 

Small business owners reported a seasonally adjusted average employment change per firm of 0.06 workers per firm, a solid showing. Fourteen percent (up 1 point) reported increasing employment an average of 1.9 workers per firm and 10 percent (unchanged) reported reducing employment an average of 4.8 workers per firm (seasonally adjusted). 

 

Fifty-two percent reported hiring or trying to hire (down 1 point), but 44 percent (85 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 (up 2 points), revisiting the high for this recovery and the best reading since 2007. 

 

Thirty-two percent of all owners reported job openings they could not fill in the current period, up 1 point, the highest reading in this recovery.  This is one of the tightest labor markets in the 43 year history of the NFIB survey. Twelve percent reported using temporary workers, down 1 point.

 

 

A seasonally adjusted net 15 percent plan to create new jobs, down 3 points but still a very strong reading.  Not seasonally adjusted, 24 percent plan to increase employment at their firm (unchanged), and 3 percent plan reductions (down 1 point).  By industry, the net percent of firms planning to increase their employment was highest in construction and manufacturing.  By region, job creation plans were strongest in the west, particularly in the West North Central, Mountain and Pacific states, reversing a rather sluggish period of weakness.

 

 

 

CAPITAL SPENDING

 

Sixty-two percent reported capital outlays, up 3 points and the second highest reading since 2007 (November 2016 was 63 percent, the highest).  Of those making expenditures, 45 percent reported spending on new equipment (up 3 points), 26 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 3 points).  Overall, a decent report on spending.

 

 

 

The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 26 percent, just below the highest reading in the recovery. Although these are high readings for the recovery, they are historically weak and have yet to reflect the optimism about sales and business conditions that occurred when President Trump was elected.  Reports of actual outlays appear to be trending up, but still remain well below those observed in “good times”.  Growth takes more than optimism, it takes more spending, at least rising to historically normal levels.

 

 

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 4 percentage point to 2 percent and the first positive reading since early 2015.  This measure has been positive in only 6 months since 2007 and as low as negative 35 percent.  Consumer optimism soared after the election and is lifting actual sales, but at a slow pace.

 

 

Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 3 points to a net 26 percent of owners, this after a 20 point rise in December.  This leaves expectations at very positive levels but not yet confirmed by actual improvements in sales trends.

 

 

INVENTORIES:

 

The net percent of owners reporting inventory increases fell 2 points to a net 1 percent (seasonally adjusted), extending the accumulation reported in January.  This will be positive for GDP growth, and will hopefully be absorbed by stronger spending rather than depressing future investment in inventory stocks.

 

The net percent of owners viewing current inventory stocks as “too low” improved 3 points to a net negative 2 percent. 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 rose 1 point to a net 3 percent. not strong, but positive.

 

 

INFLATION: 

 

The net percent of owners raising average selling prices was a net 6 percent (up 1 point).  Ten percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 16 percent reported price increases (up 1 point).  The frequency of reported price hikes has ticked up since November, but not enough to produce a lot of inflation.

 

 

 

 

Seasonally adjusted, a net 20 percent plan price hikes (down 1 point).  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.  Both home prices and rents are rising much faster than the overall price indices.

 

 

COMPENSATION AND EARNINGS: 

 

Reports of increased compensation fell 4 points to 26 percent, one of the best readings since February 2007 but below the recovery record level reached in January.  Owners complain at recovery record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions.  A recovery record 17 percent ranked “finding qualified labor” as their top business problem ahead of regulations, weak sales and insurance costs.  Only taxes received more “votes” as the top problem.

 

 

 

 

 

 

Earnings trends deteriorated 1 point to a net negative 13 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation and defined their bottom lines.  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:  

 

Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty 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, 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 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 15 percent citing regulations and red tape, and 17 percent the availability of qualified labor.  Weak sales garnered 12 percent of the vote.

 

 

 

Thirty-one percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans fell basis points to 5.4 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 was unchanged at a negative 3 percent. The Federal Reserve is expected to raise rates in March, 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:

 

The latest government statistics on growth confirmed that, contrary to the claims of many economists, President Trump has not interited a “strong” economy.  The 1.6 percent growth for 2016 hardly ranks among our better growth periods and the last 8 years have hardly been much better.  Coming out of the recession, small business owners were greeted with perhaps the largest tax bill every passed, the ACA and a fizzled stimulus package that mostly preserved the jobs of government workers, rather than stimulating economic growth.  An avalanche of regulations followed that all through the recovery period.  The growth we experienced was definitely in spite of government policy, not because of it.  The private sector is stubborn when it comes to growth, regardless of obsticles.

 

The Federal Reserve will raise rates another 25 basis points, but this still leaves interest rates historically low.  The percent of owners reporting paying higher interest rates on their last loan jumped 7 points to 11 percent in January and held at 9 percent in February, after averaging less than 2 percent since the recovery started in 2009.  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 Fed 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.

 

Evidence on the economy is mixed, the New York Federal Rserve puts first quarter growth at 3.1 percent while the Atlanta Federal Reserve is looking for 1.8 percent.  Both have access to the same data.  Growth will make everyone, regardless of politics, feel better.  However, the gulf between liberals and conservatives is large.  The University of Michigan/Reuters poll in February illustrated this, with the Expectations Index at 55 among Democrats, 120 for Republicans and 89 for Independents.  The Democrats expect the worst, the Republicans the best.  Spontaneous positive references to economic policy were made by a record 28 percent of consumers, 26 percent made negative references.  Reality will resolve the gap. 

 

 

                                                                                               

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

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.