Embargoed Tuesday, May 9 at 6 a.m.
(Based on 1618 respondents to the April survey of a random sample of
NFIB’s member firms, surveyed through 04/30/17)
The Index of Small Business Optimism fell 0.2 points to 104.5, sustaining the remarkable surge in optimism that started the day after the election. Five of the 10 Index components posted a gain, three declined and two were unchanged. The Index has posted historically record high readings for six month, a performance eclipsed only in 1983. The modest decline in the Index was accounted for primarily by declining expectations for business conditions, most likely due to the turmoil in Washington, D.C. and plans to make capital expenditures.
Labor market indicators remained strong, the inventory picture improved, capital spending remained high, and reports of higher prices and improved sales trends also increased in frequency. Overall, the outlook remained solid and inconsistent with a Q1 2017 GDP growth of 0.7 percent. But much of this was due to GDP math on inventory accumulation, although consumer spending was a bit weaker.
Small Business Optimism 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]
Small business owners reported a seasonally adjusted average employment change per firm of 0.19 workers per firm, a very strong showing and not consistent with last month’s Bureau of Labor Statistics (BLS) Payroll Survey number which was a surprise on the low side, but was in agreement with the Household Survey number. Fourteen percent (up 2 points) reported increasing employment an average of 2.2 workers per firm and 10 percent (up 1 point) reported reducing employment an average of 3.5 workers per firm (seasonally adjusted).
Fifty-five percent reported hiring or trying to hire (up 4 points), but 48 percent (87 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 (unchanged), far more than were concerned with weak sales.
Thirty-three percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since November 2000, the peak of the last expansion. Ten percent reported using temporary workers, down 3 points.
A seasonally adjusted net 16 percent plan to create new jobs, unchanged and a very strong reading. Not seasonally adjusted, 27 percent plan to increase employment at their firm (unchanged), and 3 percent plan reductions (unchanged). By industry, the net percent of firms planning to increase their employment was highest in construction, followed by the wholesale trades, non-professional services and manufacturing. By region, job creation plans were strongest among firms in the Pacific and Northwest Central states and New England.
Fifty-nine percent reported capital outlays, down 5 points after a surge in February and March. Of those making expenditures, 42 percent reported spending on new equipment (down 4 points), 26 percent acquired vehicles (unchanged), and 14 percent improved or expanded facilities (down 1 point). Six percent acquired new buildings or land for expansion (up 1 point) and 11 percent spent money for new fixtures and furniture (down 5 points). Overall, capital expenditures were solid after displaying some modest exuberance in the prior two months.
The percent of owners planning capital outlays in the next 3 to 6 months dropped 2 points to 27 percent, just below the highest reading in the recovery but well below historical levels for periods of growth.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was unchanged at 5 percent, the best reading since May 2015, the last time it registered a positive reading prior to 2017. Until 2017, year 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 gained 2 points to a net 20 percent of owners. This leaves expectations at very positive levels, now being confirmed by actual improvements in sales trends. Consumer confidence is at optimistic levels, a good sign, and job growth has been solid which helps support improvements in actual sales. The near-term weakness in spending was due primarily to a reduction in vehicle sales from record levels.
The net percent of owners reporting net inventory increases fell 1 point to a net negative 1 percent (seasonally adjusted), confirming an end to the accumulation reported in January which was strong. Shedding the excess stocks accumulated early in the first quarter lowered first quarter GDP estimates.
The net percent of owners viewing current inventory stocks as “too low” improved 2 points to a net negative 3 percent, as firms trimmed their excess inventory stocks in the first quarter. The surge in expected sales gains earlier in the year should make some of these “excess stocks” look acceptable, useful for meeting expected demand growth.
Nonetheless, the net percent of owners planning to add to inventory rose 1 point to a net 3 percent, the highest reading reached in this recovery. This is a positive indicator for second quarter growth.
The net percent of owners raising average selling prices was a net 7 percent (up 2 points), continuing a modest but steady increase in the percent of owners raising average selling prices. Ten percent of owners reported reducing their average selling prices in the past three months (down 2 points), and 20 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 18 percent plan price hikes (down 2 points). Nationally, 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, but car prices have shown modest declines as deals are sweetened and credit terms eased.
COMPENSATION AND EARNINGS:
Reports of increased compensation fell 2 points to a net 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 87 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A near-recovery record 16 percent selected “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. The frequency of compensation gains (wages + benefits) has grown far faster than the percent of owners raising selling prices and passing these costs on to customers.
Actual earnings was unchanged a net negative 9 percent reporting quarter on quarter profit improvements, historically an excellent reading and the best in this expansion. 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 line. 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 3 percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-two percent reported all credit needs met (unchanged), and 50 percent explicitly said they did not want a loan. However, including those who did not answer the question, 65 percent of owners have no interest in borrowing. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 17 percent citing regulations and red tape, and 16 percent the availability of qualified labor. Weak sales garnered 10 percent of the vote.
Thirty-two 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 down 1 point at a negative 4 percent. The Federal Reserve is expected to raise rates several times this year, but that will still 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 Federal Reserve will give up control of interest rates to markets and not the whims of social engineers.
THE LARGER PERSPECTIVE:
The Affordable Care Act (ACA) was full of “imperfections”, and appartently few legislators actually read it before the Democrats all got together and passed it. In fact, the ACA “details” are still being “written” by the bureaucrats. Republicans have a different approach – they seek a bill that is perfect, “there are still improvements that need to be made” commmented one Republican. So, nothing is passsed until everyone is happy, a very different apporach than the Democrats used. They got stuff done and then “tuned up” the bill after it passed but Congress established the law’s framework. With a one vote margin, if Republicans insist on making everyone “happy” they will fail to follow through on their most important promises including health care and tax reform.
The first quarter GDP number was weaker than expected, due to the math of inventory investment in GDP accounting (liquidation counts negatively because consumers are buying something made in an earlier period rather than this quarter and was counted in GDP when made and taken by a customer or added to inventory stocks), slower auto sales and a negative trade gap (buying a foreign car negates your spending since it was not make “domestically”). The economy is stronger than 0.7 percent growth, capital spending is better and inventory reductions will reverse.
The Federal Reserve may decide that even though the economy is better than “0.7”, the optics of raising rates would not be good and defer their 2 remaining rate hikes to later meetings. There is no chance they will do an “inter-meeting hike” as Greenspan was willing to do. The Fed will continue conduct this “monthly monetary policy” process, refusing to establish a longer term program of more predictable policy. Doing this each month produces much uncertainty in financial markets. Traders love this and much money is made in trading by the big banks rather than in traditional lending. In the meantime, hesitancy at the Fed raises uncertainty about the future of economic growth.
Small business owners have held on to their optimism, and have reported improvements in activities that signal more growth in the real economy, even if modest. If Congress does not disappoint, small firms are ready to bet on a more optimistic future by investing in their businesses and hiring more workers.
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.