NFIB Small Business Economic Trends - March 2017


Embargoed Tuesday, April 11 at 6 a.m.


 (Based on 704 respondents to the February survey of a random sample of

NFIB’s member firms, surveyed through 03/30/17)





The Index of Small Business Optimism fell 0.6 points to 104.7, sustaining the remarkable surge in optimism that started November 9, the day after the election.  Three of the 10 Index components posted a gain, five declined, all by just a few points, and two were unchanged.  It is encouraging that the Index has held at historically high levels for five months.  Optimism has not faded much and there is growing evidence that this optimism is being translated into more spending and hiring, although not at explosive rates.  Consumer confidence is hitting new high levels and small business owners have not given up hope that their optimism will be rewarded with performance: more customers, and more sales. 


Reports of capital spending showed strength, reports of higher worker compensation remained solid, and a few more owners reported raising selling prices and more reported positive sales trends.  Credit markets remained very friendly, although interest in borrowing has not yet shown new life.  The Uncertainty Index did rise, perhaps reflecting consternation with the slow progress on important issues like tax reform and reform of Obamacare.



Small Business Optimism and Ten Components


                                                                   March     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]





Small business owners reported a seasonally adjusted average employment change per firm of 0.16 workers per firm, a solid showing.  Twelve (down 2 points) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 4.3 workers per firm (seasonally adjusted). 


Fifty-one percent reported hiring or trying to hire (down 1 point), but 45 percent (88 percent of those hiring or trying to hire) 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 (down 1 point), far more than were concerned with weak sales. 


Thirty percent of all owners reported job openings they could not fill in the current period, down 2 points but historically high.  Thirteen percent reported using temporary workers, up 1 point.





A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and a very strong reading.  Not seasonally adjusted, 27 percent plan to increase employment at their firm (up 3 points), and 3 percent plan reductions (unchanged).  By industry, the net percent of firms planning to increase their employment was highest in manufacturing, followed closely by the services sector (professional and non-professional) and construction.  By region, job creation plans were strongest in New England and the North Central states.






Sixty-four percent reported capital outlays, up 2 points over February and 5 points over January.  Of those making expenditures, 46 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 2 points) and 16 percent spent money for new fixtures and furniture (unchanged).  Overall, capital expenditures are trending up, fueled by expectations of better tax and regulatory treatment but also by “green shoots” (remember those?) on the ground with improved sales and consumer spending.




The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 29 percent, the highest reading in the recovery.  That said, they are below levels that historically supported much higher levels of capital spending.  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.





The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 3 percentage points to 5 percent after a 4 point gain last month.  Reports of positive sales gains have improved significantly since December.  This measure has been positive in only six months since 2007 and as low as negative 35 percent. 



Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 8 points to a net 18 percent of owners.  This leaves expectations at very positive levels and now being confirmed by actual improvements in sales trends (above).  Consumer confidence is at record levels, a good sign, and job growth has been solid, helping to support improvements in actual sales.





The net percent of owners reporting inventory increases fell 1 point to a net 0 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.  With sales growing, owners will need to bolster inventory stocks and this will add some fuel to GDP growth.


The net percent of owners viewing current inventory stocks as “too low” deteriorated 3 points to a net negative 5 percent, a surprise in light of the persistence of reported sales gains this year. The surge in expected sales gains earlier in the year should make some of these “excess stocks” look OK, useful for meeting expected demand growth.   


Nonetheless, the net percent of owners planning to add to inventory stayed positive, losing just 1 point to a net 2 percent.




The net percent of owners raising average selling prices was a net 5 percent (down 1 point).  Twelve percent of owners reported reducing their average selling prices in the past three months (up 2 points), and 19 percent reported price increases (up 3 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 20 percent plan price hikes (unchanged).  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.





Reports of increased compensation rose 2 points to 28 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 near-recovery record 16 percent ranked “finding qualified labor” as their top business problem, almost as many as cite the cost of reglatory compliance as their top challenge.  There is little that government policy can do to deal with this problem short of freeing up the educational system to innovate and respond to market needs.  Rising compensation will attract workers back into the labor force but it is a slow process.







Earnings trends improved 4 points to a net negative 9 percent reporting quarter on quarter profit improvements.  The primary cause of earnings changes (up or down) was changes in sales, including “usual seasonal change”.  The ability to raise prices received little credit for higher profits.  The inability of firms to raise prices limits the extent to which firms can raise worker compensation and defend their bottom lines.  But rising labor costs, due to shortages, or, more widely, to government regulation, will continue to pressure the bottom line until demand is strong enough to support rising selling prices.






Only 4 percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically low. Thirty-two 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, 64 percent of owners have no interest in borrowing.  Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes, 17 percent citing regulations and red tape, and 16 percent the availability of qualified labor.  Weak sales garnered 12 percent of the vote.


Thirty percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was unchanged at 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 will 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 several times this year, but that will leave rates historically low.  Lenders will appreciate higher yields on loans, but loan rates will have little impact on the decisions of owners to “take the plunge” once economic conditions and policies change convincingly.  Hopefully the Fed will give up control of interest rates to markets and not the whims of social engineers.




The surge in small business owner optimism was maintained in March, the fifth month of historically off-the-charts readings. Unfortunately, the expectation for economic growth is not off the charts.  Official forecasts from the New York and Atlanta Federal Reserve Banks put first quarter growth at 0.9 percent and 2.9 percent respectivly as of March 31, hugely disparate estimates.  Domestic spending, which excludes exports but includes imports will be a more important measure for small business owners.  That should look better with consumer confidence surging, supported by solid job growth. 


On the job side, hiring plans are strong and reports of past hiring solid.  However, the inablity of owners to find applicants that can satisfactorily fill open positions will become more of a headwind to job growth.  Rising wages will attract some new participants into the workforce, but owners will also have to undertake more training to fill specialized positions.  As an example, the lack of residential construction workers is restricting growth in home construction which, in turn, is producing rising home prices.  A “manufacturing renaissance” will also require solutions to the skill shortage.


The Federal Reserve is indicating that it will raise rates several more times this year.  Given the poor economic performance of 2016 prior to the last rate hike, one might wonder what, exactly, does “data dependent” mean.  That said, expect the Fed to persist with a few more hikes, which will have little impact on lending activity and may enhance availability: loan committees are still troubled making longer term loans at rates we used to pay to depositors.  Higher rates make it more comfortable. 


In the meantime, we wait for the “fiscal policy shoe” to drop.  But actual spending wont show up until 2018, even if all goes well.  Retroactive tax rate changes might help later this year.  In the meantime, the only engine for growth is going to be the private sector and its confidence in the new management team.  Hopefully, it wont be shaken too badly by political antics.                                                                   


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.