NFIB Small Business Economic Trends - November 2017

 

Embargoed Tuesday, December 12 at 6 a.m.

 

 (Based on 544 respondents to the November survey of a random sample of

NFIB’s member firms, surveyed through 11/30/17)

 

 

Overview

 

The Index of Small Business Optimism gained 3.7 points to 107.5 in November, the second highest reading in the 44 year history of the NFIB surveys (108.0 in July 1983).  Eight of the 10 Index components posted a gain and 2 declined, one fell from its record high level.  Eighty percent of the gain in the Index was accounted for by expectations about future business conditions and real sales gains and the environment for business expansion.  The only component decline was negligible.

 

Reports of higher selling prices inched up to the highest level since the 2014 bump in economic activity, perhaps in response to the steady reports of increases in worker compensation.  Interest in borrowing remained subdued and complaints about credit availability stayed at historically low levels.  Job creation was subdued, but hiring plans soared, primarily in construction, manufacturing and professional services – these are not temporary seasonal jobs.  Finding qualified workers was the second most important problem facing owners, only taxes polled higher.  Owners are set to increase inventory stocks, especially in manufacturing, the wholesale trades and retailing, much of this seasonal in nature.  Overall, a good environment for better than average economic growth in the fourth quarter.

 

Small Business Optimism and Ten Components

 

                                                                   November    Change        Share of

                                                                                                               Change 

CREATE NEW JOBS (net)

 

 

     24%

     +6

     14%

MAKE CAPITAL OUTLAYS

 

 

     26%

      -1

      -2%

INCREASE INVENTORIES (net)

 

 

     7%

      +3

       7%

JOB OPENINGS HARD TO FILL

 

 

     30%

       -5

    -12%

INVENTORIES TOO LOW (net)

 

 

      -2%

      +3

       7%

GOOD TIME TO EXPAND

 

 

     27%

      +4

       10%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

 

     48%

    +16

       38%

EXPECT HIGHER REAL SALES (net)

 

 

     34%

     +13

       32%

EXPECT EASIER CREDIT CONDITIONS (net)

 

 

      -4%

 

       +1

       2%

EARNINGS TRENDS POSITIVE (net)

 

 

    -12%

      +2

        4%

 

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

 

  107.5

  

     +42

    +3.7

      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

 

 

 

After several solid quarters, job creation slowed in the small business sector as business owners reported a seasonally adjusted average employment change per firm of 0.0 workers.  Thirteen percent (down 1 point) reported increasing employment an average of 3.0 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). 

 

 

 

Fifty-two percent reported hiring or trying to hire (down 7 points), but forty-four percent (85 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Eighteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 2 points), second only to taxes.  This is the top ranked problem for those in construction (33 percent) and manufacturing (22 percent), getting more votes than taxes and the cost of regulations.

 

 

 

Thirty percent of all owners reported job openings they could not fill in the current period, down 5 points from the record-high level reached in July and October.  Eleven percent reported using temporary workers, down 3 points.  Reports of job openings were most frequent in construction (41 percent), manufacturing (37 percent) and retail (31 percent), likely staffing for holiday business. 

 

 

A seasonally adjusted net 24 percent plan to create new jobs, up 6 points to a record high reading.  Not seasonally adjusted, 22 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (down 2 points).  Hiring plans were strongest in construction (23 percent net of reductions), manufacturing (25 percent net) and professional services (26 percent net). 

 

 

Overall, labor demand is historically very strong, with historically high job openings and record high plans to create new jobs (the question asked is “do you plan to increase or decrease the total number of people working for you?”).  The NFIB data anticipate a strong fourth quarter of economic growth.

 

CAPITAL SPENDING

 

Fifty-nine percent reported capital outlays, unchanged.  Of those making expenditures, 40 percent reported spending on new equipment (down 1 point), 29 percent acquired vehicles (up 5 points), and 16 percent improved or expanded facilities (unchanged).  Six percent acquired new buildings or land for expansion (down 1 point) and 13 percent spent money for new fixtures and furniture (up 1 point). 

 

 

The percent of owners making a capital expenditure is a good predictor of the trend in business investment spending in the entire economy.  Small businesses produce half of our private GDP, employ half of the private workforce and are the primary producer of new jobs (SBA.gov FAQ) and tend to be much more labor intensive than firms with 500 or more employees (large business), especially in the services sector (health care, food and lodging, education etc.).  Nonetheless, capital spending by small firms (nearly 6 million employer firms and tens of millions of independent operators) collectively amount to billions of dollars of spending.  The percent of owners reporting expenditures anticipates the changes in aggregate capital investment in the economy.  “Over-predictions” in the late 1990s was a result of Y2K spending which was very widespread.  Leading up to 2007, the over-prediction is a result of the fact that most houses are built by small businesses in the thousands of communities, large and small, across the U.S.  Under-prediction since 2009 was a result of the domestic focus of small firms vs. large firms in the recovery.  Since January, small business owners have anticipated a soilid recovery in capital spending, due in large part to the expectation of a meaningful tax overhaul.

 

 

 

Twenty-six percent plan capital outlays in the next few months, down only 1 point from October.  Plans were most frequent in construction (31), agriculture (33 percent), and manufacturing (34 percent).  Improvements in productivity depend crucially on investment spending in the labor intensive small business sector.  The new tax bill will provide more certainty about expensing, tax rates, etc. and this will significantly improve the environment for capital spending.

 

 

SALES

 

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 negative 5 percent, a 6 point decline from October.  Consumer spending slowed in November, especially at “bricks and mortar” establishments.

 

 

 

Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 13 points, rising to a net 34 percent of owners, consistent with reported surges in consumer sentiment from the University of Michigan and the Conference Board.  Very positive sales expectations are undoubtedly behind the surge in hiring plans and inventory investment. 

 

INVENTORIES:

 

The net percent of owners reporting inventory increases fell 2 points to a net negative 2 percent (seasonally adjusted).  Even though sales were weak, owners still reduced their current inventory stocks.

 

The net percent of owners viewing current inventory stocks as “too low” gained 3 points to a net negative 2 percent, a more positive view of current stocks.

 

 

The net percent of owners planning to add to inventory rose 3 points to a net 7 percent, a solid figure that is supportive of fourth quarter growth.  The 7 percent readings from September and November are the best since 2006.  Inventory investment has been a major contributor to the growth in GDP in the second half of the year.

 

INFLATION: 

 

The net percent of owners raising average selling prices rose 2 points to a net 10 percent seasonally adjusted.  Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped, but the percent of owners raising prices, net of those reducing, has doubled since January, a slow crawl to higher inflation.  Unadjusted, ten percent of owners reported reducing their average selling prices in the past three months (unchanged), and 17 percent reported price increases (up 1 point), illustrative of the dynamics of price adjustments in the private sector to changes in economic conditions and demand. 

 

 

 

Seasonally adjusted, a net 23 percent plan price hikes (up 1 point), although far fewer will report actually doing so in the following months.    

 

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 were unchanged at a net 27 percent, historically very strong all year.  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.  Tight labor markets are historically associated with high percentages of owners raising worker compensation except in the early recovery from the Great Recession and in 2017.

 

 

 

Owners complain at 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.  Eighteen percent selected “finding qualified labor” as their top business problem, far more than cite weak sales or the cost of regulations as their top challenge.  Plans to raise compensation fell 4 points in frequency to a net 17 percent, still a solid number, a surprise as labor markets seem to be getting tighter. 

 

 

 

The frequency of reports of positive profit trends improved 2 points to a net negative 12 percent reporting quarter on quarter profit improvements, a solid reading historically, among the best since 2007.  Firms that survived the Great Recession and 8 years of sub-par growth have learned how to make money in hard times and benefit at the bottom line when the economy suddenly picks up speed (3 percent or better growth).

 

 

CREDIT MARKETS:  

 

Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low.  Thirty-two percent reported all credit needs met (up 3 points) and 48 percent said they were not interested in a loan, down 5 points.  Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 16 percent citing regulations and red tape, and 18 percent the availability of qualified labor.  Weak sales garnered 11 percent of the vote. In short, credit availability and cost is not an issue and hasn’t been for many years.

 

The important role of market interest rates is to allocate financial capital to its most valued uses.  Historically, reports of changes in interest rates paid on loans suggest that markets performed this role.  However, starting with 2008-9, the volatility in interest rates flat-lined as the Fed took rates to the “0 bound”.  Price rationing became impossible, so the adjustment shifted to credit rationing, turning down loan applicants rather than pricing risk into the interest rate offered/charged.  As the Fed lifts off the 0 bound, evidence that market interest rates maybe resuming their historical function appear in owner experiences with rate seeking in the market as reports of higher or lower rates have also risen from the “zero” level.

 

Thirty percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans was down 30 basis points at 5.6 percent, little changed even as the Federal Reserve has been raising rates.  Overall, loan demand remains steady, 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:

 

President Trump promised that we would get tired of “winning” in his term, a logical perspective because the Republicans had majorities in both houses of Congress and the Presidency.  However, the Republicans in Congress seemed slow to get the message, making little progress on the big issues (for NFIB members, the cost of healt insurance, the cost of regulations, and the tax code).  There has been important success on regulatory relief and in restructuing the judiciary, but all that without major Congressional action. Its inability to act quickly and decisively has reduced the amount of attention given to other major issues.  The 2018 election is only months away now.

 

The FOMC (Federal Open Market Committee which conducts monetary policy) is undergoing a major facelift.  Although the appointment of Powell is viewed as replacing Yellen with “Yellen”, that is not the case. Mr Powell has extensive financial market experience, something few FOMC members possess, which will help guide policy decisions.  The Federal Reserve charter calls for governors that represent the business sector, but such appointments are rare, dominated instead by academic economists. Two other new appointees are less philosophically disposed to the notion of government running the economy (rather than markets).   More positions will open in the near future and these will be filled with governors who place a different emphasis on the goal of creating inflation, an anathama to most small business owners. The Fed will boost rates again in December, but that will leave the Federal Funds rate at about half of the level that history would suggest.  The Fed is still in control of rates and bond investors bet on the Fed, not markets.

 

The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4 percent for the fourth quarter.  This is a dramatically different picture than owners presented during the 2009-16 recovery under President Obama.  The change in the management team dramatically improved expectations, and that began to translate into real spending and hiring.  There is still much uncertainty about health care and taxes, but it appears that owners believe that whatever Congress finally comes up with will be an improvement over the past 8 years and so remain positive.

 

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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.