Embargoed Tuesday, AUGUST 14 at 6 a.m.
(Based on 1718 respondents to the July survey of a random sample of
NFIB’s member firms, surveyed through 7/30/18)
Small business owners continued to deliver an “amazing” performance, taking the Small Business Optimism Index up 0.7 points to 107.9. The Index is now within 0.1 point of the record high of 108.0 reached in July 1983. The percent of owners with unfilled job openings reached another record high. Eight of the 10 Index components increased or were unchanged; the only weakness was in the inventory sector where inventory building was strong in the second quarter, which produced a slight overhang but no real weakness. Stocks look good historically and plans to order more stuff are strong – all good!
· The percent of owners with a job opening and the percent planning to create net new jobs set new record high levels.
· The percent of owners citing the availability of qualified workers as their #1 business problem landed 1 point below the record high.
· Reports of compensation increases remained strong.
· Capital spending maintained a respectable pace but did not display the exuberance of its fellow indicators, although spending plans did post a gain.
· Plans to add to inventory holdings were strong as strong sales continue to deplete stocks. Profits continued to perform and more firms raised prices, easier when demand is strong.
· No problems reported financing all of this activity.
· Overall, the small business sector is in excellent condition and growing solidly.
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]
Small business owners added the largest number of workers per firm since 2006 in July, adding a net 0.37 workers per firm on average, almost double June’s rate. Seventeen percent (up 2 points) reported increasing employment an average of 4.7 workers per firm and 11 percent (down 1 point) reported reducing employment an average of 2.0 workers per firm (seasonally adjusted). Even running at high speed, the dynamics of the labor market show the strong reallocation of human resources that characterizes a competitive market.
Fifty-nine percent reported hiring or trying to hire (down 4 points), but 52 percent (88 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 2 points), 1 point below the 45 year record high.
Thirty-seven percent of all owners reported job openings they could not fill in the current period, a new survey record high. Thirteen percent reported using temporary workers, up 1 point. Reports of job openings were most frequent in construction (57 percent) where labor shortages are clearly restricting the construction of new homes and apartments, 46 percent in manufacturing, and 45 percent in the wholesale trades. The inability to hire needed workers is a drag on GDP growth which could be better than 4.1 percent if workers could be found.
A seasonally-adjusted net 23 percent plan to create new jobs, up 3 points from June and very strong. Not seasonally adjusted, 24 percent plan to increase total employment at their firm (down 1 point), and 4 percent plan reductions (unchanged). Firms in construction and manufacturing account for the real strength in hiring plans, sectors where wages are above average. The services sector also added solid strength, while the agriculture sector is winding down the season as fall approaches.
Labor markets are very tight, for both skilled and unskilled workers. Thirty-three percent have openings for skilled workers, and 15 percent have openings for unskilled labor, both measures 2 points higher than in June. More firms are looking for workers than workers looking for a job. And the hiring strength is in industries that pay well such as construction, manufacturing, and transportation and communications. Economic growth was exceptionally strong in Q2, and is averaging over 3 percent this year to date, a good performance for the second longest expansion in history. Record job openings suggest that the economy has the potential to keep up its growth pace over the next few quarters if the “staffing problem” can be resolved or mitigated. An increase in the labor force participation rate would help.
Fifty-eight percent reported capital outlays, down 1 point from June, but solid. Of those making expenditures, 42 percent reported spending on new equipment (down 2 points), 25 percent acquired vehicles (down 1 point), and 16 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (up 1 point). Solid investment spending is necessary to produce the improvements in productivity that will secure future increases in real wages and continued growth in output.
Thirty percent plan capital outlays in the next few months, up 1 point from June. Plans were most frequent in manufacturing (40 percent, up 2 points) 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 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, down 2 points but a very good number. July is the eighth consecutive strong month of reported sales gains after years of low or negative numbers. Over 40 percent of the owners in construction and manufacturing reported sales volumes gains. They are booming.
The net percent of owners expecting higher real sales volumes rose 3 points to a net 29 percent of owners, a strong reading. A net 43 percent of construction owners expect higher sales volumes, but to build the houses, more workers will be needed or sales will disappoint. Strong expectations for higher real sales translate into higher expected returns on capital investments as well as a need for more employees.
The net percent of owners reporting inventory increases rose 6 points to a net 4 percent (seasonally adjusted). Although inventory building did not contribute overall to Q2 GDP growth, it appears that small businesses have been adding to stocks on balance, a good thing. Reports improving sales have been historically strong for the past few months, so owners have had to satisfy the strong sales demand by reducing inventories. This produced an increase in the percent of owners planning to invest in new inventory stocks and those efforts have produced the reported increase in inventories in place.
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) fell 3 points to a net negative 3 percent, historically a “lean” reading (although not as “lean” as June’s reading of 0). This confirms that the stock reductions reported were indeed a result of strong sales, not a result of a less certain future.
The net percent of owners planning to build inventories fell 2 points to a net 4 percent, solid and the thirteenth positive reading in the past 21 months. This has been very supportive of GDP growth and is supported by the improved real sales volume expectations and actual sales results.
The net percent of owners raising average selling prices rose 2 points to a net 16 percent seasonally adjusted. The chart does make it clear that it is hard to have inflation in the economy without inflation on Main Street. 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 (unchanged), and 26 percent reported price increases (up 1 point).
Seasonally adjusted, a net 24 percent plan price hikes (unchanged). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices. Shortages also create opportunities to raise prices as in the housing market. Forty-one percent of construction firms report raising average selling prices, substantially more than in any other industry group. The Federal Reserve will be monitoring its measures of inflation closely now that their goal of 2 percent appears to have been reached (house prices do not show up directly in the inflation measures).
COMPENSATION AND EARNINGS:
Reports of higher worker compensation gained a point from June to a net 32 percent of all firms (May’s record reading was 35 percent). Plans to raise compensation rose 1 point to a net 22 percent, historically strong. Government measures of wage and compensation gains follow movements in NFIB plans to raise compensation, but with a 3 quarter lag – so government reports of rising compensation will increase even more in the second half of the year.
Owners complain at record rates about labor quality issues, with 88 percent of those hiring or trying to hire in June reporting few or no qualified applicants for their open positions. Twenty-three percent (up 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 was unchanged at a net negative 1 percent reporting quarter on quarter profit improvements, one of the very 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, regulatory compliance relief continue and increasing opportunities to raise prices continue to support the bottom line.
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and just 1 point above the record low. Thirty-two percent reported all credit needs met (up 2 points) and 50 percent said they were not interested in a loan, down 4 points.
Two percent reported that financing was their top business problem (unchanged) compared to 17 percent citing taxes, 14 percent citing regulations and red tape, and 23 percent the availability of qualified labor. Four percent (up 2 points) reported loans “harder to get”, historically very 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. The percent of owners reporting paying a higher rate on their most recent loan continues to rise. The Federal Reserve is raising rates, but only if loan demand is strong can banks and other lenders charge higher rates on loans.
Thirty-two percent of all owners reported borrowing on a regular basis (up 4 points). The average rate paid on short maturity loans rose to 6.3 percent (up 20 basis points). Rates have been rising gradually with Fed policy moves, and the Fed is expected to raise two more times this year, adding 50 basis points to rates. But expectations for the economy remain strong, so the return on investment looks high, overcoming the negative impact of higher credit costs.
THE LARGER PERSPECTIVE:
President Trump was criticized for charactizing the 4.1 percent second quarter GDP growth as “amazing”, but small business owners beg to disagree with the critics. At least in the small business sector of the economy, Main Street’s performance is “amazing” based on reports for the past 45 years by NFIB’s 300,000 member firms. Owners have never been so optimistic for so long. This has translated to improved employment and investment spending that buoys GDP growth, even at the end of what will be the longest expansion in modern history.
Consumer sentiment is at record high levels. Consumer spending, which accounts for 70 percent of our economy, posted 4 percent growth in Q2. Historically revised data show that consumers have been saving much more than thought and income gains in recent months have been solid, providing support for spending in the second half. The record levels of firms reporting higher compensation is a clear indication that wages will be rising further in the second half.
The Federal Reserve is on track for a rate hike in September and in December, adding half a percent to the rate on all variable rate loans. The 10 year Treasury bond is at 3 percent, two rate hikes and prospects for more in 2019 will take that rate to 3.5 percent. This is the rate that most small business loans are priced from. However, with strong sales, lower taxes and lower regulatory costs, and the ability to raise prices, the expected return on real capital investments in plant and equipment will remain favorable, overwhelming the negative effects of higher rates.
Now the second longest expansion in history, Main Street is set to push this expansion to a new record by adding a super-charged era of growth on to the sluggish one from 2009 to 2016.
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.