Embargoed Tuesday, June 13 at 6 a.m.
(Based on 699 respondents to the May survey of a random sample of
NFIB’s member firms, surveyed through 05/30/17)
The May Index continues the remarkable surge in small business optimism that started the day after the election. Small-business confidence shot up to near record levels last November and still hasn’t come down. The Index for May matched its strong performance in April of 104.5. The Index has been at a historically high level for six straight months. In May, five of the Index components posted a gain, four declined, and one remained unchanged.
Labor market indicators remained strong, capital spending remained high, and reports of improved sales trends also increased in frequency. However, the inventory picture deteriorated a bit with inventory satisfaction and plans slipping a combined 5 points from April.
Small business owners remained confident that the policy environment emerging this year under the new Administration will continue. Owners will keep an eye on Washington, paying attention to their major concerns: healthcare reform, regulatory relief, and tax reform.
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 hit the hiring pavement with a surge, reporting an adjusted average employment change per firm of 0.34 workers per firm over the past few months. Few readings in the past 43 years of the survey have been higher. Fifteen percent (up 1 point) reported increasing employment an average of 3.0 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted).
Fifty-nine percent reported hiring or trying to hire (up 4 points), but 51 percent reported few or no qualified applicants for the positions they were trying to fill. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 3 points), far more than were concerned with weak sales.
Thirty-four percent of all owners reported job openings they could not fill in the current period, up 1 point, and the highest reading since November 2000, the peak of the last expansion. Twelve percent reported using temporary workers, up 2 points.
A seasonally adjusted net 18 percent plan to create new jobs, up 2 points and the best since November 2006.
Sixty-two percent reported capital outlays, up 3 points, bouncing back from the 5-point decline in April. Of those making expenditures, 46 percent reported spending on new equipment (up 4 points), 26 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 14 percent spent money for new fixtures and furniture (up 3 points).
The percent of owners planning capital outlays in the next 3 to 6 months increased 1 point to 28 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, this measure had been positive in only six months since 2007 and as low as negative 35 percent. Although sales gains are not surging, they clearly have some underlying strength.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 2 points to a net 22 percent of owners. This leaves expectations at very positive levels, now being confirmed by positive 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 net percent of owners reporting net inventory increases fell 1 point to a net negative 1 percent (seasonally adjusted). The net percent of owners planning to add to inventory fell 2 points to a net 1 percent from the highest reading reached in this recovery.
Inventory satisfaction deteriorated 3 points to a net negative 6 percent showing more owners with excess stocks. However, this dip should be eased by expected sales gains going forward, useful for meeting expected demand growth.
The net percent of owners raising average selling prices was a net 7 percent (unchanged), continuing a modest but steady increase in the percent of owners raising average selling prices. Nine percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 19 percent reported price increases (down 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 21 percent plan price hikes (up 3 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 increased 2 points to a net 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 86 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A recovery record 19 percent selected “finding qualified labor” as their top business problem, the second most cited. 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.
The ability to raise prices received little credit for higher profits. Actual earnings lost 1 point, falling to a net negative 10 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 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, unchanged and historically very low. Thirty-one percent reported all credit needs met (down 1 point), and 51 percent explicitly said they did not want a loan. However, including those who did not answer the question, 66 percent of owners have no interest in borrowing. Only 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 19 percent citing the availability of qualified labor, and 13 percent regulations and red tape. The cost of insurance garnered 11 percent of the vote.
Twenty-eight percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans was up 50 basis points to 5.9 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 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 small business sector remains poised to do its part to contribute to overall economic growth. The heavy burden of taxes, health insurance and regulations must be eliminated to support their efforts. The New York Federal Reserve estimates second quarter growth at 2.2 percent while the Atlanta Federal Reserve anticipates growth at 3.4 percent. To appreciate the magnitude of that gap, 1.2 percentage points is equal to or greater than the growth of the entire economy in many quarters over the past eight years. Removing the penalties embedded in our tax code and regulatory structure which waste valuable time and hours will do much to speed up the growth rate, making the U.S. a growth leader.
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.