Embargoed Tuesday, October 10 at 6 a.m.
(Based on 629 respondents to the September survey of a random sample of
NFIB’s member firms, surveyed through 09/28/17)
The Index of Small Business Optimism fell 2.3 points to 103.0 in September, a significant decline from August. Three of the 10 Index components posted a gain, six declined and one was unchanged. Two of our largest states, Florida and Texas, were devastated by hurricanes in the survey period; however, the response rate in those states was unchanged from prior months. The mail got through, but for large parts of the two states, “shopping” was not possible. Tens of thousands of houses were probably lost and a half million cars rendered inoperable. Hurricane recovery spending will provide a significant boost to economic activity in the fourth quarter and into 2018, reducing the odds of a recession next year. The news about tax reform came out too late to have a significant impact on expectations, the October survey will reflect whatever impact that debate will have.
Labor market indicators point to continued good jobs reports, but reports of actual employment gains for September turned negative as more firms reported reductions than increases in employment. Reports of increases in compensation remained at historically high levels, but softened as did the net percent of firms raising their selling prices. Inventory investment plans strengthened, supported by hurricane-induced demand increases. Reports of capital outlays declined along with the percent of owners viewing the current period as a good time to expand.
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]
Job creation weakened in the small business sector as business owners reported an adjusted average employment change per firm of -0.17 workers. Decreases were reported by owners in six of the nine Census regions, so it wasn’t just a hurricane effect. Twelve percent (down 2 points) reported increasing employment an average of 2.7 workers per firm and 13 percent (up 1 point) reported reducing employment an average of 2.0 workers per firm (seasonally adjusted). Widespread flooding and power losses prevented customers from reaching stores and workers from reaching their employer, with many not open for business due to flooding or power loss. Small businesses are most vulnerable to these problems.
Fifty-seven percent reported hiring or trying to hire (down 2 points), but 49 percent (86 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 qualified workers as their Single Most Important Business Problem (unchanged), second only to taxes. This is the top ranked problem for those in construction (30 percent) and manufacturing (28 percent), getting more votes than taxes and regulatios.
Thirty percent of all owners reported job openings they could not fill in the current period, down 1 point. September continues a very high string of readings, but 5 points below July’s near-record level. Eleven percent reported using temporary workers, down 2 points. Reports of job openings were most frequent in construction (49 percent), manufacturing (42 percent) and non-professional service (35 percent).
A seasonally adjusted net 19 percent plan to create new jobs, up 1 point from August, a strong reading. Not seasonally adjusted, 20 percent plan to increase employment at their firm (unchanged), and 6 percent plan reductions (unchanged). Hiring plans were strongest in construction, manufacturing and non-professional services where job openings are most frequent. Residential construction activity would be stronger if builders were able to find more qualified workers and fill their open positions. With labor shortages already constraining the construction of new homes, finding labor for reconstruction in Texas, Florida, Puerto Rico and the Virgin Islands is problematic.
Fifty-nine percent reported capital outlays, down 1 point. Of those making expenditures, 39 percent reported spending on new equipment (down 3 points), 23 percent acquired vehicles (down 1 point), and 13 percent improved or expanded facilities (down 3 points). Six percent acquired new buildings or land for expansion (down 1 point) and 12 percent spent money for new fixtures and furniture (up 3 points).
The percent of owners planning capital outlays fell 5 points to 27 percent. The recovery from the hurricanes will undoubtedly raise these numbers. Plans were most frequent in agriculture (29 percent), the wholesale trades (28 percent), and manufacturing (38 percent).
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 1 percent, a 2 point decline from August. Consumer spending slowed at the end of the third quarter and hurricanes definitely depressed shopping in large parts of the country.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes lost 12 points, falling to a net 15 percent of owners, this after large gains in July and August. What triggered such a large decline in expectations is less clear, as reports on the economy (e.g. 3.1 percent GDP growth in the second quarter etc.) were fairly good. Respondents in Florida and Texas were no less optimistic than their counterparts in the rest of the country.
The net percent of owners reporting inventory increases fell to a net negative 2 percent (seasonally adjusted), a decline of 3 points, indicating more inventory reduction than in August. With stock depletion larger, inventory investment is more likely to be stronger in the coming months.
The net percent of owners viewing current inventory stocks as “too low” gained 2 points to a net negative 3 percent, a more positive view of current stocks and more supportive of future inventory investment.
The net percent of owners planning to add to inventory rose 5 points to a net 7 percent, a very strong reading consistent with stronger depletion of stocks last month and a more favorable (less negative) view of current stocks. Strong inventory investment will support stronger GDP growth in the fourth quarter.
The net percent of owners raising average selling prices declined 3 points to a net 6 percent. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped. Ten percent of owners reported reducing their average selling prices in the past three months (up 1 point), and 15 percent reported price increases (down 2 points).
Seasonally adjusted, a net 19 percent plan price hikes (down 1 point), a figure that has typically been 2 to 3 times larger than the percent that a month later report actually raising prices. Raising prices doesn’t mean that higher sales follow – price hikes will not stick if there is not strong demand to support them.
The Federal Reserve has operated with a view that rising wages (or labor costs) will always produce inflation. Although there is a positive correlation between labor cost increases and price increases, it is not perfect, indicating that there are other intervening factors that shape just how quickly labor costs are passed on to customers in higher prices.
COMPENSATION AND EARNINGS:
Reports of higher worker compensation fell 3 points to a net 25 percent, still historically strong. The Federal Reserve is hoping this will result in inflation as owners pass these costs on in the form of higher selling prices, but to date, their wish has not been granted to any significant degree.
Owners complain at 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 near-record 19 percent selected “finding qualified labor” as their top business problem, far more than cite weak sales their top challenge. Plans to raise compensation rose 3 points in frequency to a net 18 percent, a logical response to labor market tightness. But labor market conditions will result in many more actually raising compensation, to keep or attract the employees they need.
The frequency of reports of improved profit trends was unchanged at a net negative 11 percent reporting quarter on quarter profit improvements, historically a solid reading and one of the best readings in this expansion. In spite of rising labor costs, owners are seeing decent bottom line performance. Most of those reporting higher profits credit improved sales, just 4 percent said higher selling prices improved the bottom line.
Two percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-three percent reported all credit needs met (down 1 point) and 51 percent said they were not interested in a loan, up 2 points. Only 1 percent reported that financing was their top business problem compared to 21 percent citing taxes, 16 percent citing regulations and red tape, and 19 percent the availability of qualified labor. Weak sales garnered 11 percent of the vote.
Twenty-nine percent of all owners reported borrowing on a regular basis (down 2 points). The average rate paid on short maturity loans was up 10 basis points at 5.6 percent, little changed even as the Federal Reserve raises rates. 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.
THE LARGER PERSPECTIVE:
Second quarter GDP growth was revised upward to 3.1 percent, the best growth rate in years. Third quarter growth will be hampered by the hurricanes in our 2nd and 4th largest states. Shopping was difficult without a boat and if your boat made it to your workplace, it may have been flooded or without power. Rebuilding will add to growth in the fourth quarter, but replacing assets that were lost is not an optimal use of funds, even if necessary. It only replaces wealth lost rather than adding new productive assets to our economy. Third quarter estimates of growth from the Atlanta and New York Federal Reserve Banks range from 2.7 percent to 1.5 percent respectively. Another 3 percent growth quarter is not likely for Q3. However, Q4 is shaping up to be better, even before hurricane recovery stimulus.
The Federal Reserve announced the plan to reduce its $4.5 trillion portfolio. Other things equal, the withdrawal of Federal Reserve demand for Treasury bonds to replace those coming due will put an upward pressure on interest rates. However, other factors such as foreign demand for U.S. securities could easily overwhelm this in the early stages of portfolio reductions. The Federal Reserve will raise its benchmark rate in December in an attempt to produce a federal funds rate that is more “normal” and further away from the “zero floor,” just in case the economy falters and the Fed needs to cut rates.
Owner optimism posted a decline but remained historically very high, driven primarily by reduced optimism about sales, business conditions and the environment for expanding a business. However, fundamental Index components were stronger, with gains in hiring plans and inventory investment plans. Capital spending plans were weaker but down from a very high level last month, returning to levels more typical this year. With recent improvement in other economic indicators including the September ISM Non-Manufacturing Index which is at its highest since 2005, and the prospect of recovery spending, the fouth quarter doesn’t look bad at all.
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.