Embargoed Tuesday, SEPTEMBER 11 at 6 a.m.
(Based on 680 respondents to the August survey of a random sample of
NFIB’s member firms, surveyed through 8/30/18)
It’s a RECORD! Small business owners continued to deliver an “amazing” performance, taking the Index of Small Business Optimism up 0.9 points to a record-high of 108.8. Breaking the 35 year old record signals a defining moment for the U.S. economy. Small business owners have never been this optimistic about the economy in the last 45 years. Six of the 10 Index components advanced, three declined, and one was unchanged. Job creation plans and job openings both set new records, reflecting the need for workers and the tightness of the labor supply. Capital spending plans were the highest since 2007 and inventory investment plans the strongest since 2005.
· Index of Small Business Optimism breaks 35 year record soaring to 108.8.
· Job Openings hit new record high.
· SMIP Labor Quality hit a record high (25%).
· Good Time to Expand tied record high at 34%.
· Inventory Plan highest since Dec. 2005 (also net 10%).
· Capital Expenditure Plans highest since July 2006.
The economy is “hot,” especially for one that is about to deliver the longest expansion in history. There is no doubt that an enormous part of that energy is coming from the small business sector, now setting records for plans to hire, available job openings, capital spending plans, earnings growth and inventory investment plans, all drivers of GDP growth and employment. Over 20 million small firms that produce nearly half of non-government GDP and employ about half of the private workforce are experiencing a period of exuberance-driven growth rarely if ever experienced.
The cause of this run was a change in economic policies that lightened the burden of government on the private sector (tax cuts and regulatory reform and reduction) and that presented a more optimistic future for economic policy and the opportunity to invest and grow. Owners are willing to “bet” (invest, hire) on a future that is promising and they are clearly doing to “big time”.
The August Index has more “muscle” than any past reading. The “hard” component of the Index (job creation plans, job openings, capital spending plans, inventory plans, and earnings) soared to a historic record reading of 107.9. This caps a change in the complexion of the Index which was dominated by the “soft” components (inventory satisfaction, good time to expand, expected business conditions, sales expectations, and expected credit conditions) at the beginning of the record run that started in December 2016, but is now driven by the spending and hiring components, generators of GDP growth.
As a leading indicator of economic activity, the Index turned up sharply post-election in November 2016 and headed to readings in the top 5 percent of the Index history in December, never looking back. Soon after the 2016 election, economic activity soared, rising from 1.8 percent GDP growth to 3 percent. Profits are driving the stock indices for “small” firms to record levels, mirroring the record levels of profit gains for NFIB firms.
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]
After posting significant gains in employment in July, job creation slowed among small firms in August, perhaps because there were fewer workers available to hire because job openings hit a 45 year record high. Fifteen percent (down 2 points) reported increasing employment an average of 3.2 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.4 workers per firm (seasonally adjusted).
Sixty-two percent reported hiring or trying to hire (up 3 points), but 55 percent (up 3 points and 89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. A record 25 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points).
Thirty-eight percent of all owners reported job openings they could not fill in the current period, a new survey record high. Seventeen percent reported using temporary workers, up 4 points. Reports of job openings were most frequent in construction (62 percent) where labor shortages are clearly restricting the construction of new homes and apartments, manufacturing (47 percent), and wholesale trades (45 percent). The inability to find qualified applicants is slowing growth in construction and slowing distribution due to a shortage of drivers. Filling those job openings would boost the level of output for the economy.
A seasonally-adjusted net 26 percent plan to create new jobs, up 3 points from July and a survey record. Not seasonally adjusted, 26 percent plan to increase total employment at their firm (up 2 points), and 4 percent plan reductions (unchanged). Firms in construction, the wholesale trades, and manufacturing account for the real strength in hiring plans, sectors where wages are above average.
Labor markets are very tight, for both skilled and unskilled workers. Thirty-five percent have openings for skilled workers (up 2 points), and 16 percent have openings for unskilled labor, up 1 point. More firms are looking for workers than people 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.
Fifty-six percent reported capital outlays, down 3 points from July. Of those making expenditures, 39 percent reported spending on new equipment (down 3 points), 22 percent acquired vehicles (down 3 points), and 18 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (unchanged) and 15 percent spent money for new fixtures and furniture (up 2 points). Overall, August showed a weaker investment spending picture even though prospects for the economy remain strong.
Thirty-three percent plan capital outlays in the next three to six months, up 3 points and the best since 2007. Plans to invest were most frequent in manufacturing (49 percent, up 9 points from July) where additional capacity and productivity-enhancing investments are needed. In industries like manufacturing, new capital equipment can mitigate 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, up 2 points and a very good number. August is the ninth consecutive strong month of reported sales gains after years of low or negative numbers. Over 35 percent of the owners in construction, manufacturing, the wholesale trades and transportation reported sales volumes gains. They are booming.
The net percent of owners expecting higher real sales volumes fell 3 points to a net 26 percent of owners, still a strong reading. 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 was unchanged at a net 4 percent (seasonally adjusted). Consumer spending has been strong and is expected to continue on a solid path requiring a buildup of inventory to meet demand. Net additions to the stock of inventory for all firms adds to GDP growth.
The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 3 percent. This suggests that inventories are looking a bit excessive in some parts of the economy. This is not the case in manufacturing where 3 percentage points more report inventories too low than too high.
The net percent of owners planning to build inventories rose 6 points to a record net 10 percent, the fourteenth positive reading in the past 22 months. Should the owners follow through and succeed in increasing inventories over the next three months, GDP growth will receive a good boost in the third quarter.
The net percent of owners raising average selling prices rose 1 point to a net 17 percent, seasonally adjusted. Unadjusted, the data indicate a lot of price movement, with 9 percent (unchanged) reporting lower average selling prices and 25 percent (down 1 point) reporting higher average prices. Thirty-nine percent of the construction firms reported raising prices while 4 percent reduced. Thirty-seven percent of the firms in agriculture report lower average prices compared to 11 percent who raised prices. Inflation does not appear to be a threat in the current environment, but the trend is moving upward. The net percent of firms raising price was negative in each of the first three quarters of 2016, averaging -2 percent. In the fourth quarter it was 2 percent, and has marched steadily upward ever since. Rapid growth provides opportunities to raise prices and in some cases, such as housing, forces prices to rise due to short supply relative to demand.
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. The Federal Reserve will be monitoring its measures of inflation closely now that their goal of 2 percent appears to have been reached although house prices do not show up directly in the inflation measures.
COMPENSATION AND EARNINGS:
Reports of higher worker compensation remained unchanged at a net 32 percent of all firms, 3 points shy of May’s record reading of 35 percent. Plans to raise compensation fell 1 point to a net 21 percent, historically strong. Strength in this indicator has been shown to be very predictive of various measures of worker wage and compensation gains, suggesting more strengthening in worker compensation in the second half of the year.
Owners complain at record rates about labor quality issues, with 89 percent of those hiring or trying to hire in August reporting few or no qualified applicants for their open positions. Twenty-five 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 rose 2 points to a net 1 percent reporting quarter on quarter profit improvements, the second highest reading in the survey’s 45 year history. May 2018 holds the record of a net 3 percent. The new tax law will contribute to favorable profit performances as the year progresses. In the meantime, strong sales and 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-three percent reported all credit needs met (up 1 point) and 51 percent said they were not interested in a loan, up 1 point.
Two percent reported that financing was their top business problem (unchanged) compared to 15 percent citing taxes, 13 percent citing regulations and red tape, and 25 percent the availability of qualified labor. Five percent (up 1 point) 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 was unchanged at 17 percent, the highest reading since February 2007. 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 (unchanged). The average rate paid on short maturity loans fell to 6.1 percent (down 20 basis points). Rates have been rising gradually with Fed policy moves, and the Fed is expected to raise rates two more times this year. 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:
Stock indices are hitting new highs as the economy keeps producing good numbers. New heights of small business optimism contradict the convential storyline that the recovery is losing stream, that we should prepare ourselves for the downturn. Worriers focus on the role of FAANG stocks driving the market higher. But recently, the Russell 2000, a “small company” stock index began posting record gains as well, based on very favorable profit reports for small businesses. The “small cap” companies in the Index are much larger than NFIB members, but their experience mirrors the record reports of rising profits among NFIB members. The small business engine continues to roar with the dramatic change in economic policies since November 2016.
In December 2016, the Index jumped 8 points to 105.7, virtually equal to its average reading since then of 105.8. At the beginning of this historic run, the Index gains were dominated by expectations: good time to expand, expected real sales, and expected business conditions. Now the Index is dominated by stuff that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans, and, earnings. Small business is clearly helping to drive that “4 percent growth” in the domestic economy.
Credit is not a problem, few report being unable to meet their financing needs. The Ten Year Treasury yield did hit 3 percent, a rate typically used by small business lenders as the base for loan interest rates. And, the Federal Reserve is expected to tack on another 50 basis points by year end. Mortgage rates may be affecting the housing market, although the inability of builders to increase housing supply and the asociated rise in house prices are probably a bigger problem for our construction firms who can’t hire the workers they need.
Politics, rather that the strong economy and low unemployment, will continue to dominate the news. But this is not likely to have much of an impact on the level of economic activity which is on course to equal or surpass last quarter’s performance.
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 mon Tthly surveys contain between 400 and 900 respondnts. 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.