NFIB Small Business Economic Trends - July 2017


Embargoed Tuesday, August 8 at 6 a.m.


 (Based on 1533 respondents to the July survey of a random sample of

NFIB’s member firms, surveyed through 07/31/17)





The Index of Small Business Optimism rose 1.6 points to 105.2, but sustained the surge in optimism that started the day after the election.  Seven of the 10 Index components posted a gain, two declined and one was unchanged.    The Index peaked at 105.9 in January, just 0.7 points above the July reading.  While Washington “fiddles”, Main Street is doggedly moving forward, not distracted from the business at hand – more customers.   The economy (GDP) grew about 2 percent in the first half of the year, nothing special, but the second quarter was much stronger than the first and consumer spending was a major contributor to growth.  The stock market continues to post record high readings, a bit inconsistent with the weak growth in output from the nation’s business sector.


Labor market indicators surged to near-record levels and owners reported strong net hiring over the past few months. Reports of job openings hit a 43 year record high.  Reports of increases in compensation remained at historically high levels.  The frequency of reported price increases was the highest since 2014, but still historically low.  Inventory investment plans strengthened supported by stronger consumer spending.  Reports of capital outlays were unchanged, and plans to spend faded a little.  Capital investment is still not supportive of stronger economic growth.  Expectations for improved business conditions and higher real sales posted strong gains, anticipating a stronger second half economy. 


Small Business Optimism and Ten Components

                                                                   July          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 an adjusted average employment change per firm of 0.21 workers per firm over the past few months, a solid performance.  Thirteen percent (up 3 points) reported increasing employment an average of 4.5 workers per firm and 11 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). 


Sixty percent reported hiring or trying to hire (up 6 points), but 52 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Nineteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (up 4 points), second only to taxes.  This is a particularly severe problem in Construction (28 percent) and Manufacturing (21 percent) where labor shortages are the top problem, trumping taxes and regulatory costs.


The most “typical” reason for “disqualification” of an applicant was a lack of specific job skills (cited by 26 percent of employers), followed by a poor work history (16 percent).  Poor English and math skills typically disqualified 10 percent of the applicants.  A lack of social skills disqualified 14 percent, unreasonable wage expectations 14 percent, attitude 12 percent, and appearance 8 percent, all factors that the applicant could easily improve without additional training if they really wanted a job.  Drug issues were a typical reason for disqualification for 10 percent of the owners and legal status for 6 percent.








Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points, and a near-record high reading. Fourteen percent reported using temporary workers, up 3 points.  Reports of job openings were most frequent in Construction (48 percent), Manufacturing (40 percent) and Non-professional Services (38 percent).  Openings for “unskilled” workers were most frequent in Manufacturing (16 percent), and the Retail and Wholesale Trades (17 percent each). 





A seasonally adjusted net 19 percent plan to create new jobs, up 4 points and a near-record high.  Not seasonally adjusted, 21 percent plan to increase employment at their firm (up 1 point), and 5 percent plan reductions (up 1 point). 




Hiring plans were strongest by far in Construction and Manufacturing where job openings are most frequent.   Residential construction growth was not strong in the second quarter, due in part to a shortage of labor.  The supply of new homes cannot keep up with demand and house prices are rising much faster than the inflation rate.




Fifty-seven percent reported capital outlays, down 1 point.  Of those making expenditures, 38 percent reported spending on new equipment (down 2 points), 24 percent acquired vehicles (up 3 points), and 13 percent improved or expanded facilities (down 2 points).  Five percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (up 2 points).  There is still little evidence that capital spending, which raises worker productivity, is going to increase its contribution to growth anytime soon.




Perhaps the decline will be reversed in the coming months as the percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 30 percent, the strongest reading since 2007.  Plans were most frequent in Professional Services (33 percent) and Agriculture and Retailing (32 percent each).








The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a net 0 percent, a 4 point improvement over June (which was a bit weak on retail sales in spite of strong income growth) but well below April levels.




Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 5 points, rising to a net 22 percent of owners.   Stronger sales expectations are very supportive of the record hiring plans and strong inventory investment plans recorded in July.





The net percent of owners reporting net inventory increases gained 4 points to a net 1 percent (seasonally adjusted), reversing months of inventory stock reductions that were generated by solid consumer spending in the second quarter (although June was flat, in particular new car sales). 


The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net negative 2 percent, as sales expectations changed for the better, requiring higher inventory stocks.


The net percent of owners planning to add to inventory rose 1 point to a net 5 percent, the highest reading this year to date and historically normal for a growing economy.  This is a positive indicator for second half growth and consistent with the improvement in real sales expectations and future business conditions.





The net percent of owners raising average selling prices posted a 7 point increase, erasing the dramatic decline posted in June and rising to a net 8 percent of all firms.  This is the highest reading since 2014, and good news for the Fed which is trying to generate more inflation.  Nine percent of owners reported reducing their average selling prices in the past three months (down 2 points), and 18 percent reported price increases (up 4 points). 




Seasonally adjusted, a net 23 percent plan price hikes (up 4 points). 

If expectations for sales volumes are realized, some of the price hikes may stick.  That said, the Fed should be delighted that inflation remains well below 2 percent as the economy continues to grow.  There is nothing “magic” about 2 percent inflation and danger associated with trying to create more inflation as a matter of policy.






While inflation remains low, reports of higher worker compensation continue to be strong, consisted with historically tight labor markets.  Reports of increased compensation rose 3 points to a net 27 percent.  The Fed is hoping this will result in inflation as owners pass these costs on in the form of higher selling prices. 


Owners complain at 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 record 19 percent selected “finding qualified labor” as their top business problem, far more than cite weak sales their top challenge.  Readings this high were last seen at the end of the last expansion in 2000. 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 reports of improved profit trends was unchanged at a net negative 10 percent reporting quarter on quarter profit improvements, historically an excellent reading and one of the best readings in this expansion. In spite of rising labor costs, owners are seeing decent bottom line performance. 


Higher selling prices received little credit for higher profits, improved sales got all of the credit.  Poor bottom line performance was blamed on weaker sales and rising labor costs and unwelcomed selling price reductions.  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.






Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low.  Thirty-one percent reported all credit needs met (up 4 points) and 51 percent explicitly said they were not interested in a loan, down 3 points.  Including those who did not answer the question, 66 percent of owners have no interest in borrowing, down 3 points.  Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 18 percent citing regulations and red tape, and 19 percent the availability of qualified labor.  Weak sales garnered 8 percent of the vote.


Thirty percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans was up 30 basis points at 5.9 percent. Overall, loan demand remains historically weak, even with cheap money.  Small businesses have been restructuring over the past ten years, profit trends have been historically good, and owners are in a good position to borrow once they have a good reason to do so.




General indicators of credit market conditions show continued gradual improvement.  Owners report improving success in collecting receivables, they report paying their own bills at a faster pace and trade credit is increasingly available.



The net percent of owners expecting credit conditions to ease in the coming months deteriorated 1 point to a net negative 4 percent, not much change in recent months. 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 surrender control of interest rates to markets and not the whims of social engineers.





It appears that the Fed will stay on course, with a likely announcement about shrinking the portfolio in September and another 25 basis point increase in rates in December.  Neither of these moves will have a major impact on owners, interest rates are still low and lenders are more comfortable making loans now that we have left the “0 floor” behind.


Second quarter GDP growth came in at 2.6 percent (first estimate, two revisions to come).  First quarter was revised down to 1.2 percent.  Consumers spent more, but residential investment weakened and capital spending did not add to the growth.  Inflation measures were lower in Q2, not good news for the Fed but they should be pleased that inflation has remained so low.  Protecting the value of the dollar is their job.


Although there has been no progress on health care or tax reform, many important changes to the regulatory structure have been made and few if any new rules are showing up in the Congressional Register.  These changes will seep into the regulatory structure with little fanfare, but will have significant impacts on regulation costs over the years, impacting operating and compliance costs across a broad diversity of business activities.


Apparently economic activity in the second quarter was good enough to divert owner attention from the impotence of Washington lawmakers, there’s nothing like more customers to make owners happy, and optimism held up as did important measures of spending and hiring plans.  Congress still holds the key to faster growth, let’s hope they open the door.




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.