NFIB Small Business Economic Trends - May


Embargoed Tuesday, June 12 at 6 a.m.


 (Based on 562 respondents to the May survey of a random sample of

NFIB’s member firms, surveyed through 5/24/18)






The Index of Small Business Optimism increased significantly in May to 107.8, a large gain of 3.0 points. This is the second highest Index reading in its 45 year history.


·         Reports of compensation increases hit a 45 year record high.

·         Views about expansion are the most optimistic in survey history

·         Reports of positive earnings trends at a survey record high

·         Reports of positive sales trends are the highest  since 1995

·         Concerns about labor quality second highest in survey history

·         Reports of price hikes the highest since 2008 (Oil $140/bbl.)

·         Plans to raise prices are the highest since 2008.


Labor market indicators remained very strong, reported job creation was good, muted by reports of difficulties in finding qualified applicants to fill open positions.  Reports of increased compensation reached a survey record high.  Capital spending strengthened bolstered by record levels of optimism about the environment for substantial expansion.  Inventory investment plans surged to meet expected increases in real sales volumes.  Near record high reports of quarter over quarter sales improvements supported record high reports of quarter over quarter gains in profits.  The incidence of price increases was the highest since 2008, supporting nominal sales growth and bottom line performance.  Interest in borrowing to support growth gained substantial strength, the best since 2007. 



Small Business Optimism and Ten Components


                                                                                                                  Share of

                                                                      May          Change             Change 















































































[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]




Reports of employment gains remain strong among small businesses.  Owners reported adding a net 0.20 workers per firm on average, slower than earlier in the year but strong.  Clearly, the availability of qualified workers is impeding the growth in employment.  Job openings are at record high levels and complaints about the availability of qualified workers illustrate the problem.  Sixteen percent (unchanged) reported increasing employment an average of 3.4 workers per firm and 8 percent (down 1 point) reported reducing employment an average of 3.2 workers per firm (seasonally adjusted). 





Fifty-eight percent reported hiring or trying to hire (up 1 point), but 48 percent (83 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.  Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), the highest reading since 2000, the best job year in history (64.7 percent of the adult population had a job), and 1 point below the survey record high.  Concerns about taxes and regulatory costs have taken a back seat to worries about the availability of qualified workers.



Thirty-three percent of all owners reported job openings they could not fill in the current period, down 2 points but historically very high.  Twelve percent reported using temporary workers, unchanged.  Reports of job openings were most frequent in construction (57 percent), indicative of the problems slowing up new home construction which is resulting in rising house prices.




A seasonally-adjusted net 18 percent plan to create new jobs, up 2 points from April and very strong.  Not seasonally adjusted, 26 percent plan to increase total employment at their firm (down 1 point), and 3 percent plan reductions (unchanged). 



Labor markets are very tight, for both skilled and unskilled workers.  Twenty-nine percent have openings for skilled workers, the third highest reading since 2000, with the two higher readings occurring in the last 12 months.  Twelve percent have openings for unskilled workers, 4 points below the record high of 16 percent reached in March this year.  The demand for unskilled labor is strongest in the “transportation, travel, communication and utilities” sector, 50 percent stronger than in the other three leading sectors, construction, manufacturing and the wholesale trades.



Job growth will continue to lag expectations as shortages of qualified workers restrict job creation.  In the meantime, reports of increases in labor compensation reached record levels (35 percent) as owners try to attract needed employees and retain those already on board.  Reports of increased compensation were highest in “transportation, travel, communication and utilities” followed by construction, manufacturing, and financial services, all industries where output and job growth could be increased significantly if more qualified workers could be found. 






Sixty-two percent reported capital outlays, up 1 point.  Of those making expenditures, 47 percent reported spending on new equipment (up 4 points after 4 points in April), 24 percent acquired vehicles (down 3 points), and 16 percent improved or expanded facilities (unchanged).  Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (down 2 points).  The strength in equipment spending is essential to improvements in worker productivity and cost control and is a welcome development.



Twenty-nine percent plan capital outlays in the next few months, up 3 points.  Plans were most frequent in manufacturing (39 percent) where additional capacity and productivity-enhancing investments are needed and in construction (35 percent, up 3 points) where labor-saving investments are needed to increase the number of housing starts and completions.  In the short run, a “machine” is not the best substitute for an employee, but a rising shortage of “qualified” workers will encourage such investments in the longer run.





A net 15 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, up a humongous 7 points and the sixth consecutive strong month.  After a blow-out holiday season, consumer spending slowed in the first quarter according to the Bureau of Economic Analysis, contributing to a weaker first quarter GDP number.  On Main Street, there was no slowdown in reports of improving sales trends.  Customers (consumers and other businesses) have continued their spending spree, pushing up sales (and profits) on Main Street.  Reports of sales gains were most frequent in Manufacturing, Transportation etc., and Professional Services.





The net percent of owners expecting higher real sales volumes rose 10 points to a net 31 percent of owners.  Sixty-seven percent of construction firms and 58 percent of manufacturing firms expect higher real sales volumes in the coming months.  To prepare for this, owners will have to hire more employees and build inventory, or miss out on potential sales.






The net percent of owners reporting inventory increases was unchanged net 4 percent (seasonally adjusted), extending a five month run of substantial inventory building (a boost to GDP growth) in anticipation of stronger real sales. 



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 unchanged at a negative 4 percent.  The build in inventory is not excessive in the minds of owners expecting continued strong sales, although stocks appear to be on the “heavy” side compared to historical readings.



The net percent of owners planning to build inventories rose 3 points to a net 4 percent, the nineteenth positive reading in the past 20 months.  This has been very supportive of GDP growth over that period and has strengthened with the improvement in real sales volume expectations and actual sales results, with reports of positive growth trends the best since 1995.




The net percent of owners raising average selling prices rose 5 points to a net 19 percent seasonally adjusted, resuming a march to higher average selling prices that started in the fourth quarter of 2016 (elections matter – in many ways).  The Federal Reserve’s target of 2 percent inflation (based on the headline Personal Consumption Deflator) has not been reached, but it is close.  The chart does make it clear that it is hard to have inflation in the economy without inflation on Main Street.  Unadjusted, 6 percent of owners reported reducing their average selling prices in the past three months (down 3 points), and 28 percent reported price increases (up 2 points).





Seasonally adjusted, a net 26 percent plan price hikes (up 4 points).  With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices, although tax cuts, lower regulatory costs, and growing operating profits alleviate some of this pressure.  Still, as the gap between the percent raising compensation and raising prices closes, more of these costs will be passed on to customers in higher selling prices. 





Reports of higher worker compensation pushed 2 points higher to a record net 35 percent of all firms.  Plans to raise compensation fell 1 point to a net 20 percent, high but below its recent peak of 24 percent in January.  A well known measure of labor cost, the Employment Cost Index, is highly correlated with the percent of owners planning to raise worker compensation 3 quarters earlier, suggesteing that labor costs will accelerate later this year and into early 2019.


Owners complain at record rates of labor quality issues, with 83 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions.  Twenty-three percent (up 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.






The frequency of reports of positive profit trends improved 4 percentage point to a net 3 percent reporting quarter on quarter profit improvements, the best reading in the survey’s 45 year history.  Although the new tax law will impact profits this year, much of the current improvement to date has been due to gains in operating profits and stronger sales.  Sales gains from stronger growth fall to the bottom line before costs such as rising labor 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, unchanged and historically low.  Thirty-seven percent reported all credit needs met (up 5 points) and 43 percent said they were not interested in a loan, down 7 points and the lowest reading since April, 2007.  If sustained, this will mark a shift from the borrowing sidelines that has plagued lending markets since the recession.  For the last 10 years, repressive economic policies have suppressed loan demand by creating a hostile growth environment and little hope for future growth.  The Fed tried to fight this by artificially depressing interest rates, the cost of a loan.  But the expected returns on investments made with borrowed funds were depressed by economic policy, so low rates did not trigger borrowing to support spending and the economy languished for a decade.  Now, the percent of owners viewing the current period as a good time to expand their businesses is at record high levels, and owners are ready to borrow to invest in their firms, even if rates are rising.  Washington policymakers blamed banks for not lending, but this was an erroneous view that supported bad policymaking.


Only 1 percent reported that financing was their top business problem compared to 17 percent citing taxes, 13 percent citing regulations and red tape, and 23 percent the availability of qualified labor.  Five 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-four percent of all owners reported borrowing on a regular basis (up 3 points).  The average rate paid on short maturity loans was unchanged at 6.4 percent.  Rates have been rising gradually with Fed policy moves.  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.  For those experiencing a rate increase, this is not a happy event, but not an impediment to borrowers who now see much higher rates of return on investments in a growing economy with lower tax rates.  Bigger picture, it is important to return the job of capital allocation to markets and interest rates, and not Federal Reserve policy. We have twice experienced in recent times the cost of interest rate suppression, “too low for too long”.















A number of prominent politicians are expressing concerns about protecting our democracy.  A vibrant democracy depends on a strong, free, private sector.  Political freedom is very important (voting, expressing political views) but so is economic freedom, the right to direct the fruits of your labor every day to your own interests.  The Administration has implemented important policy changes that strengthen the private sector.  The new tax code is returning money to the private sector where history makes clear it will be better invested than by a government bureaucracy.  Regulatory costs, as significant as taxes, are being reduced.  The misuse of government for political purposes is being exposed (the “deep state” problem), abusers of government power are weeded out.    Protecting our democracy requires that the private sector not be deprived of its right to manage its economic affairs and the process of loosening governments grip on the private sector is underway.  History has proven that governments cannot deliver the success that a free economy can.

There is much more work to be done.  Rising healthcare costs have not been addressed and tax code complexity was not addressed in the new tax code.  But we are on the right path.


These “big picture” develpments  are supporting a Main Street economy that is on fire.  Hiring is proceeding as fast as labor supply issues allow, compensation is at record high levels, and capital spending the strongest in decades as owners feel it is once again a good time to expand their firms.  Sales are historically strong and positive profit trends at the best level ever (45 years).  Accounting for about half of the economy, Main Street is definitely driving economic growth and employment to higher levels.


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.


Index is 107.8, second only to the elusive 108.0 in July 1983.

Earnings is positive (3) for the first time ever, easily beating last month’s record high (-1).

Good time to expand is a record-high 34, beating out Jan/Feb 2018 (32).

Actual sales (15) is the highest since Oct. 2005 (also 15). Last time it was higher was Nov. 1995 (22).

Taxes is 17, which isn’t 13, but it’s still below the 20s that it had been in before the TCJA.

Labor Quality is 23, again the highest since Dec. 2000 (also 23) and second only to May 2000 (24).

Percent raising prices (19) is highest since Sept. 2008 (20).

Percent planning price increases (26) is highest since Aug. 2008 (30).

Actual compensation increases is a record-high 35, beating out May 2000 (34).

Percent of businesses not seeking loans (59) is the lowest since Jan. 2009 (also 59). Last time it was lower was Oct. 2007 (58).