Embargoed Tuesday, OCTOBER 9 at 6 a.m.
(Based on 642 respondents to the September survey of a random sample of
NFIB’s member firms, surveyed through 9/28/18)
Small business owners continued to deliver a spectacular performance with September’s third highest Index reading in the survey’s 45 year history. The Index fell slightly from August’s survey record breaking high of 108.8 to 107.9. Six of the ten Index components declined, three advanced and one was unchanged, exactly reversing last month’s gain. Most of the decline came in the “hard” components of the Index (down 14 points) but still registered as the second highest reading since 1998, partially offset by some improvement in the expectation components (up 3 points).
Although the “hard” components accounted for most of the Index decline, it still signals very strong economic activity for the balance of the year. Actual capital spending in the past few months rose significantly, reported gains in net employment per firm were solid, and owners bulked up inventories, all real contributors to GDP growth. Third quarter GDP will be strong, although probably not eclipsing the 4 percent mark achieved in Q2. But it will clearly signal that the economy will enter the fourth quarter with a lot of momentum.
[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 picked up again in September, rising to a net addition of 0.15 workers per firm (including those making no change in employment). Thirteen percent (down 2 points) reported increasing employment an average of 4.6 workers per firm and 11 percent (up 1 point) reported reducing employment an average of 1.9 workers per firm (seasonally adjusted).
Sixty-one percent reported hiring or trying to hire (up down 1 point), but 53 percent (down 2 points and 87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, down 3 points but historically very high.
Thirty-eight percent of all owners reported job openings they could not fill in the current period, unchanged from August’s record high. Fourteen percent reported using temporary workers, down 3 points. Reports of job openings were most frequent in construction (56 percent, down 6 points) where labor shortages are clearly restricting the construction of new homes and apartments, manufacturing (54 percent, up 7 points), transportation (51 percent), wholesale trades (44 percent), and retail (43 percent) where customers are showing up in large numbers. There are more job openings than job seekers, and the competition for qualified workers is pushing up compensation, especially for the better trained and educated employees.
A seasonally-adjusted net 23 percent plan to create new jobs, down 3 points from August’s record high. Not seasonally adjusted, 24 percent plan to increase total employment at their firm (down 2 points), and 6 percent plan reductions (up 2 points). Firms in construction (a net 26 percent unadjusted), the wholesale trades (a net 28 percent), and manufacturing (a net 34 percent) account for the real strength in hiring plans.
Labor markets are very tight, for both skilled and unskilled workers, making it difficult to fulfill those plans. Thirty-six percent have openings for skilled workers up 1 point and a record high. Fifteen percent have openings for unskilled labor, down 1 point. The labor force is growing, but not with the speed or skill composition or geographical distribution needed to fill the open positions with qualified workers.
The shortage of “qualified” applicants was examined in 2007 and again in 2017 to better understand why so many non-technical openings remain unfilled. Well over 80 percent of the owners who actively hired or tried to hire reported “few or no qualified applicants” for their open positions. Asked for “typical” reasons why an applicant was unqualified, 26 percent identified the lack of a specific skill (e.g. welder) and 16 percent a poor work history (reliability, etc.). However, surprisingly high percentages cited social skills, attitude, and appearance as disqualifiers, all easily remedied without going back to school for more training if a job was truly desired by the applicant.
Sixty percent reported capital outlays, up 4 points from August. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (down 2 points). Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (down 2 points). Overall, an improved actual investment spending picture as prospects for the economy remain strong.
Thirty percent plan capital outlays in the next three to six months, down 3 points, but the second best reading this year. Plans to invest were most frequent in construction (35 percent), transportation (35 percent), and the wholesale trades (39 percent). Continued strong growth is using up capacity pushing more owners to replace and expand capital expenditures.
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points. Consumer spending in August did pull back, but recovered in September with consumer sentiment very strong, and real incomes growing. Over 35 percent of the owners in construction, manufacturing, and the wholesale trades reported sales volumes gains.
The net percent of owners expecting higher real sales volumes rose 3 points to a net 29 percent of owners, a very 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 rose 1 point to a net 5 percent (seasonally adjusted). Consumer spending temporarily slowed in August, likely producing excess inventories. Spending has picked up again and this will reverse the build-up.
The net percent of owners viewing current inventory stocks as “too low” rose 2 points to a net negative 1 percent (a positive number means more think stocks are too low than too high, a positive for inventory building). This suggests that inventories are looking a bit tighter as consumer spending picked up.
The net percent of owners planning to build inventories fell 7 points to a net 3 percent, reversing August’s record net 10 percent, but the fifteenth positive reading in the past 23 months. Additions to the stock of inventories adds to GDP growth numbers.
The net percent of owners raising average selling prices dropped 2 points to a net 15 percent seasonally adjusted. Unadjusted, the data indicate a lot of price movement, with 11 percent (up 2 points) reporting lower average selling prices and 25 percent (unchanged) reporting higher average prices. Thirty-one percent of the construction firms reported raising prices (4 percent reduced) while 42 percent of the firms in agriculture report lower average prices (16 percent raised).
Inflation does not appear to be a threat in the current environment. The average net percent of firms raising price was negative in each of the first three quarters of 2016, averaging a negative 2 percent. In the fourth quarter it was 2 percent, and has marched steadily upward up until the past few months. 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. But overall, there appears to be little threat of an inflation surge.
Seasonally adjusted, a net 24 percent plan price hikes, unchanged over the last four months. 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 pressures to raise prices, especially in the housing market. 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 rose 5 points to a new record of a net 37 percent of all firms, surpassing May’s record reading of a net 35 percent. Plans to raise compensation rose 3 points to a net 24 percent, a near-record high. 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 remainder of the year, just in time for the holidays.
Owners complain at record rates about labor quality issues, with 87 percent of those hiring or trying to hire in September reporting few or no qualified applicants for their open positions. Twenty-two percent (down 3 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 (last month was a record high, 25 percent).
The frequency of reports of positive profit trends fell 2 points to a net negative 1 percent reporting quarter on quarter profit improvements, historically very high. Earnings performance remains very good, even with record high reports of increasing labor compensation and moderating reports of price hikes.
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and just 1 point above the record low. Twenty-seven percent reported all credit needs met (down 6 points) and 53 percent said they were not interested in a loan, up 2 points.
Three percent reported that financing was their top business problem (up 1 point) compared to 17 percent citing taxes, 14 percent citing regulations and red tape, and 22 percent the availability of qualified labor. A net 3 percent (down 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 was one point lower at a net 16 percent. The Federal Reserve is raising rates, but only if loan demand is strong can banks and other lenders charge higher rates on loans.
Twenty-nine percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans rose 120 basis points to 7.3 percent, a substantial jump. Rates have been rising gradually with Fed policy moves, and the Fed is expected to raise the federal funds rate one more time this year, adding 25 basis points. Expectations for the economy remain strong, overcoming the negative impact of higher credit costs.
THE LARGER PERSPECTIVE:
The economy continues to deliver an “amazing” performance for one so near its record length. A large part of that has been the revivial of the small business sector that began with the election results announced in the first week of November 2016. Animal spirts were released, optimism soared, and spending and hiring followed.
Since the election, results of the Administration’s econmic policies have been exceptional to date. In the small business half of the economy, this year has produced 45 year record high measures of job openings, hiring plans, actual job creation, compensation increases (actual and planned), profit growth, and inventory investment. Actual capital spending has also posted substantial gains.
At the coference of the National Association for Business Economics this month in Boston, a major focus was on the amount of debt, public and private, being accumulated around the world, not just in the U.S. But, apparently small business owners are not participating in that “party” as regular borrowing activity is historically low and the percent of owners “not interested in a loan” is historically high. Only three percent say they didn’t get all the credit they wanted and 3 percent report credit as their top business problem, about as low as it can go.
The economy is growing faster than our ability to support that growth without inflation or significant productivity gains. Many analysts observe that with the labor force growing about 0.7 percent a year and output per worker (productivity) growing about 1.5 percent per year (at best), it is hard to support demand growth in excess of about 2 percent (the sum of the two which measures our growth in the capacity to produce output). So, with growth running at 3 percent and higher, this presents issues in the future. A good example of this is the impact of the shortage of labor on our ability to grow and produce more stuff. Of course, there are changes that can neutralize some of these problems including higher labor force particiaption rates induced by higher compensation, labor saving technology, new scientific breakthroughs, and the like. Hopefully policymakers will help steer us through by opening doors and not creating more roadblocks.
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.