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)
Overview
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
Change
|
CREATE NEW JOBS (net) |
|
|
16% |
+1 |
*% |
|
|
MAKE CAPITAL OUTLAYS |
|
|
29% |
+3 |
*% |
|
|
INCREASE INVENTORIES (net) |
|
|
2% |
-1 |
*% |
|
|
JOB OPENINGS HARD TO FILL |
|
|
30% |
-2 |
*% |
|
|
INVENTORIES TOO LOW (net) |
|
|
-5% |
-3 |
*% |
|
|
GOOD TIME TO EXPAND |
|
|
22% |
0 |
*% |
|
|
EXPECT BETTER BUSINESS CONDITIONS IN 6
MONTHS(net) |
|
|
46% |
-1 |
*% |
|
|
EXPECT HIGHER REAL SALES (net) |
|
|
18% |
-8 |
*% |
|
|
EXPECT EASIER CREDIT CONDITIONS (net) |
|
|
-3% |
0 |
*% |
|
|
EARNINGS
TRENDS POSITIVE (net) |
|
|
-9% |
+4 |
*% |
|
|
|
|
|
|
|
|
|
|
TOTAL
CHANGE INDEX
OF SMALL BUSINESS OPTIMISM (1986 =
100) |
|
|
104.7 |
-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 0.16 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.
CAPITAL SPENDING
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.
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 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.
INVENTORIES:
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.
INFLATION:
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.
COMPENSATION AND EARNINGS:
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.
CREDIT MARKETS:
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 LARGER PERSPECTIVE:
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.