Embargoed Tuesday, April 10 at 6 a.m.
(Based on 570 respondents to the March survey of a random sample of
NFIB’s member firms, surveyed through 3/30/18)
The Index of Small Business Optimism slipped in March to 104.7, 2.9 points below the February reading of 107.6, the second highest level in its 45-year history. The Index has been higher only 20 times out of the last 432 surveys.
· Taxes received the fewest votes as the #1 business problem since 1982, falling from 22 percent reporting it as their #1 business problem in November to 13 percent in March.
· Labor quality remained the #1 problem for the third straight month.
· Reports of improved earnings trends were the second best since 1987.
· Reports of compensation increases held at the highest level since 2000.
· Reported job creation posted another solid gain, best since 2006.
· The net percent of owners reporting higher selling prices continued to rise, reaching the highest level since 2008.
Hiring plans remained strong, and reports of labor quality as a top business problem remained at record levels. Fewer owners reported capital outlays, but the decline came in vehicle and equipment purchases, while major expansion activities increased in frequency, good news. Overall, the small business sector has responded very positively to the new management team and its economic policies, leading the economy to what appears to become 12 months of 3 percent GDP growth, much better than the eight years under the previous administration.
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 remained solid in the small business sector as owners reported a seasonally-adjusted average employment change per firm of 0.36 workers, one of the best readings in survey history. Fourteen percent (unchanged) reported increasing employment an average of 2.8 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 3.1 workers per firm (seasonally adjusted).
Fifty-three percent reported hiring or trying to hire (up 1 point), but 47 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-one percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 1 point), exceeding the percentage citing taxes or regulations.
Thirty-five percent of all owners reported job openings they could not fill in the current period, up 1 point and tied with July and October 2017 for the highest reading since November 2000. Ten percent reported using temporary workers, down 5 points – it looks like many temporary workers transitioned into permanent positions. Reports of job openings were most frequent in construction (44 percent) and manufacturing (40 percent).
A seasonally-adjusted net 20 percent plan to create new jobs, up 2 points from February and at historically high levels. Except for the last four months, the last time job creation plans reached 20 percent was in 1999, nearly 20 years ago. Not seasonally adjusted, 30 percent plan to increase total employment at their firm (up 3 points), and 2 percent plan reductions (down 1 point). Hiring plans were strongest in construction (net 44 percent), manufacturing (net 34 percent), and the wholesale trades (net 33 percent). The availability of qualified workers will undoubtedly moderate actual job growth, even if the labor force participation rate picks up again.
Labor markets are very tight, for both skilled and unskilled workers. The strong demand indicated by the NFIB data anticipates an unemployment rate below 4 percent in the coming months. Thirty-three percent reported raising compensation to attract or retain employees, the highest since November 2000. Although expected real sales volumes weakened, reports of positive sales trends were very good and growth has been strong, leaving labor demand historically very strong.
Fifty-eight percent reported capital outlays, down 8 points from February’s impressive reading (highest since 2004). Of those making expenditures, 39 percent reported spending on new equipment (down 6 points), 24 percent acquired vehicles (down 6 points), and 16 percent improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 2 points) and 12 percent spent money for new fixtures and furniture (down 3 points). It appears that the decline in spending was concentrated in purchases of vehicles and equipment. The good news in the details, is that expenditures on improved and expanded facilities continued to rise as did acquisitions of new buildings and land for expansion. That’s big stuff.
Twenty-six percent plan capital outlays in the next few months, down 3 points. This is not a surprise after the “binge” in spending reported in the last few months. Plans were most frequent in manufacturing (38 percent) where additional capacity and productivity-enhancing investments are needed. The construction sector is also planning for heavy investment activity, but their major problem is the lack of labor, not equipment. Improvements in productivity depend crucially on investment spending in the labor intensive small business sector. Twenty-nine percent of the owners in the professional services sector plan outlays, a labor-intensive sector where productivity gains are often hard to come by.
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, unchanged and the fourth consecutive strong month. Consumer spending continues to provide solid support to economic growth, but the recent uptick in business spending has added to the strength in overall spending.
The net percent of owners expecting higher real sales volumes fell 8 points, to a net 20 percent of owners. The decline is surprising in light of the continuing good news for jobs and the economy, as well as continued reports of better sales from small business owners. Sixty percent of the decline in the Index was accounted for by worsening expectations for business conditions and expected real sales. Just what triggered this shift is not clear, but the April survey may provide more insight.
The net percent of owners reporting inventory increases fell 4 percentage points to a net 3 percent (seasonally adjusted), still positive and extending a three month run of substantial inventory building (a boost to GDP growth). If sales weaken as many owners expect, owners will be forced to reduce their inventory building.
The net percent of owners viewing current inventory stocks as “too low” (a positive number means more think stocks are too low than too high, a positive for inventory building) was a net negative 6 percent, down 3 points suggesting that current stocks are looking more excessive in light of diminished sales expectations. If actual sales continue to be as strong as this month, this view of inventories will likely change, inducing more inventory investment.
Consistent with weaker sales expectations and dissatisfaction with current stocks, the net percent of owners planning to build inventories fell 3 points to 1 percent. Plans averaged 4 percent over the last six months, so March represents a decided downshift. However, accumulation is not expected to stop, just slow down.
The net percent of owners raising average selling prices rose 3 points to a net 16 percent seasonally adjusted, after a 3-point increase in both February and January. This is the highest reading since 2008 when the percent raising prices plunged from 30 percent to negative 25 percent in just a few months due to the run up in oil prices right before the economy started its fall into the Great Recession.
Gradually, the Federal Reserve is getting its wish for more inflation. Unadjusted, 8 percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 26 percent reported price increases (up 4 points after a 7-point gain over the last two months).
Seasonally adjusted, a net 25 percent plan price hikes (up 1 point), although far fewer will report actually doing so in the following months. This is the highest reading since 2008. With reports of increased compensation running high, there is more pressure to pass these costs on in higher selling prices, although tax cuts and growing operating profits alleviate some of this pressure. Still, the gap between the percent raising compensation and raising prices is closing, more of these costs will be passed on to customers. The NFIB data predict a PCE inflation rate of 2.1 percent in the months ahead.
COMPENSATION AND EARNINGS:
Reports of higher worker compensation rose 2 points to a net 33 percent, the highest reading since 2000. The Federal Reserve has predicted this will result in inflation as owners pass these costs on in the form of higher selling prices, but so far, this has not materialized in any meaningful way.
Owners complain at record rates of labor quality issues, with 89 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Twenty-one percent (down 1 point) selected “finding qualified labor” as their top business problem, more than cited taxes, weak sales, or the cost of regulations as their top challenge.
Plans to raise compensation fell 3 points to a net 19, down from its recent peak of 24 percent in January. Perhaps the recent gain in labor force participation has reduced the pressure to raise compensation a bit as hiring became somewhat easier. The decline in temporary employment as new jobs were added at a record high rate seems to support this view.
The frequency of reports of positive profit trends declined 1 percentage point to a net negative 4 percent reporting quarter on quarter profit improvements, still one of the best readings in survey history. Reports of earnings gains surged 11 points in January and has remained elevated over the last two month. Although the new tax law will impact profits this year, much of the current improvement is due to gains in operating profits and stronger sales. Improved sales gains fall to the bottom line before costs catch up. Overall, the new tax law and the strong economy are very supportive of profit improvements.
Four percent of owners reported that all their borrowing needs were not satisfied, up 2 points and historically low. Thirty-one percent reported all credit needs met (down 1 point) and 47 percent said they were not interested in a loan, down 4 points. Only 2 percent reported that financing was their top business problem compared to 13 percent citing taxes, 14 percent citing regulations and red tape, and 21 percent the availability of qualified labor. Weak sales garnered 11 percent of the vote. Four percent reported loans “harder to get”, historically low. In short, credit availability and cost are not issues and haven’t been for many years, even with the Federal Reserve raising interest rates.
Thirty-two percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans was up 40 basis points at 6.1 percent. In anticipation of the Federal Reserve rate hikes, borrowers have increased their demand for fixed rate loans with longer maturities. As the Federal Reserve moves away from its focus on keeping rates low, more firms are reporting changes in the interest rates they pay, suggesting that we may be returning the job of capital allocation to markets and interest rates, and not to Federal Reserve policy.
THE LARGER PERSPECTIVE:
Growth in the fourth quarter was revised up to 2.9 percent, leaving growth at 3 percent for the last nine months of 2017. If the first quarter this year comes in at or close to 3 percent, the economy will have logged a full 12 months of 3 percent GDP growth, 50 percent better than growth in the prior administration. Job growth continues to produce high numbers and the labor force participation rate has improved as jobs are more plentiful.
The Federal Reserve is expected to raise rates several more times this year and continue its plan to not reinvest proceeds from maturing bonds in its portfoilo. By itself, this reduces the demand for bonds and thus raises interest rates. Putting more pressure on rates is the Treasury’s need to sell a lot of bonds to finance the deficit, which imposes additional pressure on rates (higher rates must be paid to get private investors to take them). Rising interest rates will, of course, not be a positive development for equity prices or asset prices in general. Interest rates on variable price loans will rise. Less clear is the impact on long term rates, but they are likely to continue to move higher.
The percent of owners reporting higher average selling prices has risen steadily since October 2016, from a net 2 percent to a net 16 percent. This should raise the overall average increase in average prices for the economy. The Federal Reserve has predicted that the inflation rate would rise to 2 percent and then stay there (without explaining how the inflation rate would stop rising). Using 45 years of NFIB and inflation data makes it clear that serious inflation for the economy is dependent on serious inflation on Main Street – lots of firms raising average selling prices. So far, the percent raising prices is not supportive of serious inflation, but a clear trend has been established. A look at past inflation makes clear that the price of “things” has been falling steadily while the price of labor intensive “services” has been increasing. The small business sector is “labor intensive” and labor services are rising in cost, whether in areas like health care or in construction. Reports of compensation gains are running well ahead of reports of price increases, but the gap is narrowing.
The big picture remains solid, with small firms as optimistic, and inclined to spend and hire as they have ever been. Tax cuts will start to impact firms directly and positively impact their customers. Economic growth will continue to be strong and that will spur more capital investment and hiring on Main Street.
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.