Embargoed Tuesday, July 10 at 6 a.m.
(Based on 665 respondents to the June survey of a random sample of
NFIB’s member firms, surveyed through 6/29/18)
The June Index of Small Business Optimism is the sixth highest reading in survey history. The Index declined slightly in June, falling 0.6 points to 107.2. Since December 2016, the Index has averaged an astounding, unprecedented 105.4, compared to 92.4 for 2009-2016, well below the 45 year average of 98. The 1983-1990 expansion boasted an Index average of 101.5, including the record reading of 108.0. Although less exuberant that the current run, it produced quarterly job creation of 689,000 new jobs compared to 440,000 in the 2009-2016 period, even with a much bigger economy.
· Plans to create new jobs posted a solid gain and the percent of owners with open positions tied the record high.
· Reports of compensation increases remained historically high and finding qualified workers easily held on to the top spot in the “most important business problem” list.
· Thirty-six percent of all owners reported job openings they could not fill in the current period, up 3 points matching the survey record high set in November 2000.
· Sixty-three percent of owners reported hiring or trying to hire, up five points from last month and the highest level since September 1999.
· Plans to invest in additional inventories advanced solidly, although capital spending plans slipped 1 point.
· Optimism about the economy faded some from recent record levels, but remained historically high.
· Reported price increases softened as did reports on interest rates paid.
Overall, a very solid report, with the Index among the highest reported readings in 45 years.
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]
Reports of employment gains remain strong among small businesses. Owners reported adding a net 0.19 workers per firm on average, virtually unchanged from May and a good number. The availability of qualified workers is impeding the growth in employment as job openings keep reaching record or near record highs. Fifteen percent (down 1 point) reported increasing employment an average of 3.6 workers per firm and 12 percent (up 4 points) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted).
Sixty-three percent reported hiring or trying to hire (up 5 points), but 55 percent (87 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 2 points), a few points below the survey record.
Thirty-six percent of all owners reported job openings they could not fill in the current period, up 3 points matching the survey record high set in November 2000. Twelve percent reported using temporary workers, unchanged. Reports of job openings were most frequent in construction (56 percent) where labor shortages are clearly restricting the construction of new homes and apartments as demand remains strong. The limited supply is resulting in strong house price appreciation.
A seasonally-adjusted net 20 percent plan to create new jobs, up 2 points from May and very strong. Not seasonally adjusted, 25 percent plan to increase total employment at their firm (down 1 point), and 4 percent plan reductions (up 1 point).
Labor markets are very tight, for both skilled and unskilled workers. Thirty-one percent have openings for skilled workers, and 13 percent have openings for unskilled labor, both ahead of the May readings. More firms are looking for workers than workers looking for a job. And the hiring strength is in industries that pay well: construction, manufacturing, and financial services.
Fifty-nine percent reported capital outlays, down 3 points from May, but solid. Of those making expenditures, 44 percent reported spending on new equipment (down 3 points), 26 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 1 point) and 12 percent spent money for new fixtures and furniture (down 1 point). Solid investment spending is necessary to produce the improvements in productivity that will secure future increases in real wages.
Twenty-nine percent plan capital outlays in the next few months, down 1 point from May. Plans were most frequent in manufacturing (38 percent) where additional capacity and productivity-enhancing investments are needed. In some industries like manufacturing, new capital equipment can alleviate some of the impact of skilled labor shortages. However, this is not a major option in service oriented industries.
A net 10 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, down 5 points but still one of the strongest readings in years. June is the seventh consecutive strong month of reported sales gains. Reports of sales increases were most frequent in manufacturing and the wholesale trades.
The net percent of owners expecting higher real sales volumes fell 5 points to a net 26 percent of owners, reversing half of the 10 point rise in May. Retailers and firms in financial services were especially optimistic about future sales prospects, the basis for their strong hiring and inventory investment plans.
The net percent of owners reporting inventory increases fell 6 points to a net negative 2 percent (seasonally adjusted), ending a five month positive run for reports of increases. Reports of positive sales trends have been historically strong for the past few months, so owners have had to satisfy the strong sales demand by selling out of inventories. This produced a nice increase in the percent of owners planning to invest in new inventory stocks in the coming months.
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) gained 4 points to a net 0 percent, a very positive move. This confirms that the stock reductions reported were indeed a result of strong sales, not a result of less certainty.
The net percent of owners planning to build inventories rose 2 points to a net 6 percent, the twentieth positive reading in the past 21 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 fell 5 points to a net 14 percent seasonally adjusted. Inflation does not appear to be a threat in the current environment. Unadjusted, 9 percent of owners reported reducing their average selling prices in the past three months (up 3 points), and 25 percent reported price increases (down 3 points). The chart does make it clear that it is hard to have inflation in the economy without inflation on Main Street.
Seasonally adjusted, a net 24 percent plan price hikes (down 2 points). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices. However, as the Federal Reserve notes, this is not happening to a significant degree, with the inflation measures only recently reaching their 2 percent goal. In June, both the percent reporting paying higher compensation and the percent raising average selling prices reversed direction.
COMPENSATION AND EARNINGS:
Reports of higher worker compensation slipped 4 points from May’s record reading to a net 31 percent of all firms. Plans to raise compensation rose 1 point to a net 21 percent, high but below its recent peak of 24 percent in January. To date, other factors such as lower taxes, lower regulatory compliance costs, and strong sales have “financed” the cost of record high reports of higher compensation.
Owners complain at record rates about labor quality issues, with 87 percent of those hiring or trying to hire in June reporting few or no qualified applicants for their open positions. Twenty-one percent (down 2 points) 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 fell from its record high in May, losing 4 percentage points to a net negative 1 percent reporting quarter on quarter profit improvements, still one of the best readings in the survey’s 45 year history. The new tax law will contribute to favorable profit performances as the year progresses. In the meantime, strong sales, and regulatory compliance relief continue to support the bottom line.
Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty percent reported all credit needs met (down 7 points) and 54 percent said they were not interested in a loan, up 11 points. These are extreme movements, and the July figures are likely to be an average of May and June.
Overall, economic policies, broadly speaking, were repressive from 2009 to 2016. The Federal Reserve tried to fight this by artificially depressing interest rates to stimulate demand (Quantitative Easing). This failed, because cheap money is not sufficient to stimulate spending, an optimistic view of the future is a critical ingredient, and this was missing until the election. Now, consumers and businesses are borrowing, and banks have the funds to support their spending and investment.
Only 2 percent reported that financing was their top business problem compared to 21 percent the availability of qualified labor, 16 percent citing taxes, and 14 percent citing regulations and red tape. Two percent reported loans “harder to get,” historically about as low as the measure can go. In short, credit availability and cost are not issues, and haven’t been for many years, even with the Federal Reserve raising interest rates.
Twenty-eight percent of all owners reported borrowing on a regular basis (down 6 points). The average rate paid on short maturity loans fell 30 basis points to 6.1 percent. Rates have been rising gradually with Fed policy moves and it is expected to raise rates two more times this year, adding 50 basis points.
THE LARGER PERSPECTIVE:
GDP growth in the first quarter was disappointing, as have been first quarter reports for several years now. Lacking a better explanation, the chatter is that there is a seasonal adjustment problem. The second quarter looks like it will come in at a much better pace (the New York Federal Reserve anticipates 2.8 percent, the Atlanta Federal Reserve 3.8 percent). Certainly economic activity on Main Street is supportive of a much better GDP growth reading. Small business owners are pushing ahead with an expansive agenda, trying to figure out how to produce more with a restricted supply of labor. Unemployment is about as low as it can go. Mortgage rates and inflation are both still historically low, and incomes are rising.
Main Street is getting the good news first hand – higher sales, more profits, opportunities to expand and grow. They see at street level the successes being achieved in the economy that news programs don’t cover nearly enough. Record numbers see the current period as a good time to expand operations and are trying to hire more workers. Capital spending is at levels not seen in a decade. Regulatory burdens are being reduced. Small business owners are focusing on what really matters and moving the economy forward. Economic growth will be solid through the end of the year 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.