NFIB Small Business Economic Trends - October

 

Embargoed Tuesday, NOVEMBER 13 at 6 a.m.

 

 (Based on 1743 respondents to the October survey of a random sample of

NFIB’s member firms, surveyed through 10/30/18)

 

Overview

 

Small business owners delivered another near record month of economic indicators and Optimism in October.  The Optimism Index shed 0.5 points, with modest declines in 5 components, no change in 4, and one increase, landing at 107.4. The “hard” components collectively fell a point while the “soft” components fell 5 points.

 

Overall, small businesses are continuing to support the three percent-plus growth of the economy and managing to continue to add significant numbers of new workers to the pool of employed workers.  The percent of owners with one or more unfilled openings is at a 45 year record high level.  Employment is growing faster than the population (210,000 per month this year to date), so the gains in jobs are being “funded” in part by increased labor force participation and population growth.  Consumer optimism is also running at near-record levels, supported by rising wages and plentiful job openings.  Inflation remains subdued, no problems with credit availability, and owners are very optimistic about the near-term economy, loading up on inventories for the fourth quarter.  Sales are expected to be very good.

 

Seasonally adjusted, 30 percent of owners think the current period is a good time to expand substantially, and an equal percent think it is a bad time.  Seventy-two percent of those reporting “good time” cite the economy and fourteen percent cite strong sales as the reason.  Of those viewing the current period as a “bad time”, twenty-five percent cite the economy, 19 percent blame sales, and seventeen percent blame the political climate, which was cited by 9 percent of the “good time” responders and twenty-seven percent of those “uncertain” about the advisability of expanding now.  “Politics” do matter, but it appears that economic factors, good or bad, are the main drivers of expansion decisions, not the political environment. 

 

 

 

 

 

 

 Small Business Optimism and Ten Components

                                                                                                                 

                                                                                                                Share of

                                                                   October         Change         Change 

CREATE NEW JOBS (net)

 

 

   22%

      -1

         *%

MAKE CAPITAL OUTLAYS

 

 

   30%

       0

         *%

INCREASE INVENTORIES (net)

 

 

     5%

     +2

          *%

JOB OPENINGS HARD TO FILL

 

 

   38%

       0

          *%

INVENTORIES TOO LOW (net)

 

 

    -2%

      -1

          *%

GOOD TIME TO EXPAND

 

 

   30%

      -3

          *%

EXPECT BETTER BUSINESS CONDITIONS IN 6 MONTHS(net)

 

 

   33%

       0

          *%

EXPECT HIGHER REAL SALES (net)

 

 

   29%8

      -1

          *%

EXPECT EASIER CREDIT CONDITIONS (net)

 

 

    -5%

 

       0

          *%

EARNINGS TRENDS POSITIVE (net)

 

 

    -3%

       -2

          *%

“HARD” COMPONENTS

 

 

 

 

 

TOTAL CHANGE

INDEX OF SMALL BUSINESS OPTIMISM  (1986 = 100)

 

 

 

  107.4

  

        -6

       -0.5

      100%

                                                                   

[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]

 

LABOR MARKETS

 

Job creation was solid in October at a net addition of 0.15 workers per firm (including those making no change in employment), unchanged from September.  Sixteen percent (up 3 points) reported increasing employment an average of 3.3 workers per firm and 11 percent (unchanged) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). 

 

 

 

 

 

 

Sixty percent reported hiring or trying to hire (down 1 point), but 53 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (unchanged).  Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), 2 points below the record high reached in August. 

 

Thirty-eight percent of all owners reported job openings they could not fill in the current period, equal to last month’s record high.  Labor markets are exceptionally tight.  Fourteen percent reported using temporary workers (unchanged).  In construction, 61 percent reported open positions, 48 percent in manufacturing, and 54 percent in transportation.  If filled, even more output would be produced and the unemployment rate would drop further. 

 

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.   Small businesses have not experienced this level of labor market related challenges since the late 1990s when Y2K produced a surge in demand for computers and programming specialists.  Current labor shortages though are more broadly distributed across industries.

 

 

A seasonally-adjusted net 22 percent plan to create new jobs, down 1 point from September.  October’s reading is 4 points below August’s record high but exceptionally strong historically.  Not seasonally adjusted, 22 percent plan to increase total employment at their firm (down 2 points), and 6 percent plan reductions (unchanged).  Job creation plans were strongest in transportation (a net 34 percent plan to expand employment), construction (a net 22 percent), and manufacturing (a net 27 percent).

 

 

However, with labor markets tight for both skilled and unskilled workers, it will be difficult to fulfill those plans.  Thirty-four percent have openings for skilled workers and 16 percent have openings for unskilled labor. The labor force is growing, but not with the speed or skill composition or geographical distribution needed to fill the available open positions with qualified workers.   In 2007, the ratio of the number of employed to the adult population (age 16 and over) was 63 percent compared to about 60 percent today.  Part of the decline is explained by “retirement” with 10,000 people turning 65 every day.  But participation by individuals in the prime working age has not recovered to its pre-2008 levels.  Rising compensation may induce more of this group to enter the labor force.  Those over 65 are participating in the labor force at higher rates than pre-2008 levels.

. 

 

Thirty-four percent reported raising overall compensation in hopes of hiring and retaining needed employees, down 3 points from September’s record high.  Wages rose at an annual rate of about 3.5 percent in the third quarter, benefits somewhat more slowly (likely fewer bonus reports). A successful hire is more likely to create a job vacancy elsewhere because the labor force is not growing quickly enough to satisfy demand, even with pervasive offers of higher pay.  The unemployment rate is expected to go lower which means that the increase in labor force participation will not be sufficient to meet new labor demands. Jobs created should be a repeat of September based on NFIB figures (with some upward revisions to September).

 

 

 

CAPITAL SPENDING

 

Fifty-nine percent reported capital outlays, down 1 point from September.  Of those making expenditures, 43 percent reported spending on new equipment (up 2 points), 26 percent acquired vehicles (unchanged), and 18 percent improved or expanded facilities (up 2 points). Seven percent acquired new buildings or land for expansion (unchanged) and 14 percent spent money for new fixtures and furniture (up 1 point).  Overall, an improved actual investment spending picture as prospects for the economy remain strong.

 

 

Thirty percent plan capital outlays in the next few months, unchanged, and among the few readings of 30 percent achieved since 2007, all in 2017 and 2018.  Plans to invest were most frequent in manufacturing (40 percent), transportation (38 percent) and the wholesale trades (40 percent).  Continued strong growth is using up capacity and owners need to replace and expand their capacity to meet the demand for their products and services.

 

SALES  

 

A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from September.    Over 30 percent of the owners in construction, manufacturing, retail and the wholesale trades reported sales volumes gains.  Consumer spending remains strong, supported by wage increases, longer working hours and a decline in the saving rate.

 

 

The net percent of owners expecting higher real sales volumes fell 1 point to a net 28 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. 

 

 

 

INVENTORIES:

 

The net percent of owners reporting inventory increases fell 1 point to a net 4 percent (seasonally adjusted).  Inventory investment has made a significant contribution to GDP growth in recent quarters, but customers continue to deplete stocks with strong spending.

                                           

 

 

 

The net percent of owners viewing current inventory stocks as “too low” fell 1 point to a net negative 2 percent, historically a very “tight” condition.   As a result, the net percent of owners planning to invest in more inventory rose 2 points to a net 5 percent, the twenty-first positive month since January, 2017, a remarkable run.

 

 

 

 

INFLATION: 

 

The net percent of owners raising average selling prices rose 1 point to a net 16 percent seasonally adjusted.  Unadjusted, the data indicate a lot of price dynamic, with 9 percent (down 2 points) reporting lower average selling prices and 23 percent (down 2 points) reporting higher average prices.  Twenty-nine percent of the construction firms reported raising prices (4 percent reduced) while 36 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 sub-par growth in early 2016 produced an average net percent raising prices of -2 percent.  This swung to a positive 2 percent in the fourth quarter after the election and has steadily increased since then until tapering in recent quarters.  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.  Overall, there appears to be little threat of a surge in inflation.

 

Seasonally adjusted, a net 28 percent plan price hikes (a 4 point jump).  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 (housing market). If the pace of price hikes (inflation) picks up, the Federal Reserve will find even more reason to hike rates in December.

 

 

 

 

 

COMPENSATION AND EARNINGS: 

 

Reports of higher worker compensation fell 3 points from its record high to a net 34 percent of all firms.  Plans to raise compensation fell 1 point  to a net 23 percent. Both readings are very strong.  Compensation gains posted by small business owers are showing up in the government statistics on wage and compensation gains, which posted solid improvements.

                                                                                                                          

Owners complain at record rates about labor quality issues, with 88 percent of those hiring or trying to hire in October 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 or regulations as their top challenge.  Better pay is the most effective way to attract needed employees and keep them.

 

The frequency of reports of positive profit trends fell 2 points to a net negative 3 percent reporting quarter on quarter profit improvements, historically very high and continuing a streak of historically very favorable profit reports.  Profits are being driven by very solid customer spending and lower regulatory compliance costs and taxes, a very favorable mix.  For those reporting higher profits, fifty-eight percent credited sales volumes, compared to thirty-two percent blaming sales for their profit declines.  Six percent credited higher selling prices for profit gains, 10 percent of those reporting lower profits blamed weaker pricing power. 

 .

 

 

 

CREDIT MARKETS:  

 

Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point.  Thirty percent reported all credit needs met (up 3 points) and 52 percent said they were not interested in a loan, down 1 point.  Three percent reported their last loan was harder to get than the previous one, historically very low.

 

 

 

Two percent reported that financing was their top business problem (down 1 point) compared to 16 percent citing taxes, 14 percent citing regulations and red tape, and 23 percent the availability of qualified labor.  Four 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 a point higher at 17 percent.  The Federal Reserve is raising rates, and market rates are rising, although reluctantly.   Lenders appreciate higher loan rates, and the strong economy promises solid returns on real investments (new equipment, expansion etc.), dampening the impact of higher loan rates.

 

 

Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points).  The average rate paid on short maturity loans fell 90 basis points to 6.4 percent.  Overall, credit markets have been very supportive of growth and will not likely become an impediment for the next few quarters.

 

 

THE LARGER PERSPECTIVE:

 

The U.S. regained the top spot in the World Economic Forum’s ranking of the most competitive country (out of 140), after losing that position with the advent of the regulatory onslaught of the Obama Administration.  Government agencies undertook rulemaking to replace legislation that could not pass in Congress.  The courts ultimately imposed the ACA on the public.  All this has changed as the grip of the government on the private sector has been significantly reduced (and continues to be), including the confiscation of hard earned income though the tax system.  A less regulated private sector delivers better outcomes for its citizens. 

 

The report noted that while the country’s institutional framework remains relatively sound, there are indications of a weakening social fabric and worsening security situation.  Technology penetration is also relatively low compared to other developed economies, including mobile-broadband subscriptions and internet use. On judicial independence and levels of corruption, the U.S. fell outside of the top 10.  Trade policy will also be an issue going forward.

 

Import growth remains strong, due to a strong dollar (imports are cheaper) and strong income growth (we buy more stuff, imported as well as domestic).  Exports weaken with a strong dollar (our stuff is more expensive to foreign consumers) and trade uncertainty.  This will slow GDP growth as we measure it – if a consumer buys a foreign car, it does not contribute to domestic growth, so imports are “subtracted” from consumer spending as a component of Gross DOMESTIC Product.

 

In the last Federal government fiscal year (ended 9/30) the economy added about $1.3 trillion in GDP (income) but the government added $1.3 trillion in debt.  Without a significant policy change, the Federal deficit will run about $1.4 trillion a year for a number of years.  The election outcome will shape our response to this problem.

 

The employment picture is exceptionally good as small businesses hire or try to hire at record rates.  Job gains have averaged 210,000 a month this year.  Both hours worked and hourly wages rose in October, a good boost to incomes, The unemployment rate for individuals with less than a highschool education is a shade over 5 percent, compared to a long term average of 9 percent.  Earnings for this group are also growing faster than for those with higher educational attainment (advanced degrees seeing the slowest growth). Unemployment rates for ethnic and racial groups are at historic low levels.  Owners report raising compensation at record rates, and this is apparently working, as the participation rate for prime working age individuals is rising in response to better pay and more widespread job availability. An unburdened small business sector is great for employment and growth of the economy.

 

Bottom line, the October report sets the stage for solid growth in the economy and in employment in the fourth quarter, while inflation and interest rates remain historically tame.  Small businesses are moving the economy forward.

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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.