NFIB Small Business Economic Trends - November


Embargoed Tuesday, DECEMBER 11 at 6 a.m.


 (Based on 700 respondents to the NOVEMBER survey of a random sample of

NFIB’s member firms, surveyed through 11/30/18)





Small business optimism faded a bit in November, the Index declined 2.6 points to 104.8.  Fifty-five percent of the decline was accounted for by Expected Business Conditions and Expected Real Sales.  The November reading continues the string of exceptionally strong readings that started with the 2016 election results.  Labor markets remain exceptionally tight, with a record 25 percent of owners identifying the scarcity of qualified (not just “skilled”) labor as their top business problem.


In 2016, the election outcome had a very significant impact on owner optimism, sending the Index from October’s below average reading of 94.9 to 105.8 a month later in December.  Within a few weeks of the election, the Index gained over 10 points only on knowledge that the management team in Washington D.C. was going to change.  No specifics on policy were available.  Actual spending and hiring followed suit as Main Street surged economically.


In November, the mid-term elections returned some of the old “management team” to power, giving control of the House back to the Democrats while the Republicans consolidated their control of the Senate. Overall, it appears that the election outcome had little impact on owner optimism this time, leaving the Index basically unchanged (data are not seasonally adjusted).  Capital spending and job creation plans improved and job openings gained 6 points, although inventory investment plans faded.  Expected real sales and expected business conditions 6 months out did fall 7 and 5 points respectively, but the percent viewing the current period as a good time to expand gained 3 points.  On balance, optimism faded modestly in November, but the decline seems unrelated to the election.



Reports of compensation increases remained exceptionally strong and plans to raise compensation reached the highest level since 1989, a response to persistently high levels of unfilled open positions. This indicates continued gains in government compensation measures over the next six to nine months.  The incidence of price increases remained stable, no inflation pressure.  Credit conditions remain stable and favorable.  Overall November data indicate a somewhat slower fourth quarter growth experience than many were hoping for, but very solid.













 Small Business Optimism and Ten Components


                                                                                                                Share of

                                                                   November     Change         Change 















































































[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 was solid in November at a net addition of 0.19 workers per firm (including those making no change in employment), up slightly from September and October readings at 0.15.  Sixteen percent (unchanged) reported increasing employment an average of 2.9 workers per firm and 11 percent (unchanged) reported reducing employment an average of 1.9 workers per firm (seasonally adjusted). 







Sixty percent reported hiring or trying to hire (unchanged), 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-five percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points), matching the record high reached in August. 


Thirty-four percent of all owners reported job openings they could not fill in the current period, down 4 points from last month’s record high.  Labor markets are still exceptionally tight.  Fourteen percent reported using temporary workers (unchanged).  In construction, 47 percent reported open positions (down 14 points – winter) and 38 percent in manufacturing.  If filled, even more output would be produced and the unemployment rate would drop further. 




A seasonally-adjusted net 22 percent plan to create new jobs, unchanged from October’s reading.  Not seasonally adjusted, 22 percent plan to increase total employment at their firm (unchanged), and 7 percent plan reductions (up 1 point).  Job creation plans were strongest in manufacturing (a net 26 percent).



However, with labor markets tight for both skilled and unskilled workers, it will be difficult to fulfill those plans.  Thirty percent have openings for skilled workers and 12 percent have openings for unskilled labor.



A successful hire in this market is more likely to create a job vacancy elsewhere because the labor force is not growing quickly enough to satisfy demand.  The unemployment rate is expected to go lower because labor demand is still in excess of the increases in labor supply.  It only takes an estimated 100,000 jobs a month (matching labor force growth) to keep the unemployment rate steady.  The November reading of 155,000 beats that even though this is over 50,000 below the October reading.  Some note that there were signs of weakness, few total hours of labor, more working part time out of necessity, even though wages rose.  The demand for labor (e.g. job openings) remained at record levels (although initial claims for unemployment benefits rose), so the near-term prospects for job growth remain very good.






Sixty-one percent reported capital outlays, up 2 points from October.  Of those making expenditures, 45 percent reported spending on new equipment (up 2 points), 22 percent acquired vehicles (down 4 points), and 18 percent improved or expanded facilities (unchanged). Eight percent acquired new buildings or land for expansion (up 2 points) and 15 percent spent money for new fixtures and furniture (up 1 point).  All categories advanced except for vehicle acquisitions which have been strong all year.



Twenty-nine percent plan capital outlays in the next few months, down 1 point, but among the strongest readings in the recovery period.  Plans to invest were most frequent in manufacturing (34 percent), transportation (32 percent) and the wholesale trades (38 percent).  Continued strong growth is using up capacity and owners need to replace and expand to meet the demand for their products and services.




A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 1 point and historically very strong.    Thirty percent or more of the owners in construction, manufacturing, retail and transportation reported quarterly improvements in sales.  Consumer spending remains strong, supported by wage increases, longer working hours and a decline in the saving rate.  Consumer spending in October was very strong, and personal income growth even stronger, setting the stage for solid spending in November and December.



The net percent of owners expecting higher real sales volumes fell 4 points to a net 24 percent of owners, a solid reading but a large decline.   Consumer spending has remained solid and small manufacturing and construction firms cannot find enough employees to fill their open positions, selling all they can produce without more workers.  Holiday spending is predicted to be strong as the fundamentals (jobs, income growth) remain solid. 






The net percent of owners reporting inventory increases rose 2 points to a net 6 percent (seasonally adjusted), the strongest reading since 2004.  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 3 points to a net negative 5 percent, suggesting that the stock of inventories is beginning to look a bit excessive given the expected decline in real sales noted above.   Still, the net percent of owners planning to add to stocks held at a net 2 percent of owners.







The net percent of owners raising average selling prices was unchanged at a net 16 percent, seasonally adjusted.  Unadjusted, the data indicate a lot of price dynamic, with 11 percent (up 2 points) reporting lower average selling prices and 24 percent (up 1 point) reporting higher average prices.  Thirty-four percent of the construction firms reported raising prices (5 percent reduced) and 35 percent of the manufacturing firms hiked prices (3 percent reduced).   In agriculture, 41 percent reported lower average prices (9 percent raised).




Seasonally adjusted, a net 29 percent plan price hikes (up 1 point), the highest since 2008 (38 percent in July 2008, 0 percent 6 months later as the economy plunged into the Great Recession).  With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices. 





Reports of higher worker compensation were unchanged at a net 34 percent of all firms, very strong.  Plans to raise compensation rose 2 points  to a net 25 percent, the highest since 1989.  Compensation gains posted by small business owers are showing up in the government statistics on personal income and 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 November reporting few or no qualified applicants for their open positions.  Twenty-five percent (up 2 points, a record high) selected “finding qualified labor” as their top business problem, more than cited taxes or regulations as their top challenge.  



The frequency of reports of positive profit trends fell 1 points to a net negative 4 percent reporting quarter on quarter profit improvements, historically solid and continuing a streak of historically 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, 61 percent credited sales volumes, compared to 32 percent blaming weaker sales for their profit declines.  Nine percent credited higher selling prices for profit gains (up 3 points), 12 percent of those reporting lower profits blamed weaker pricing power (up 2 points).  Twelve percent of those with lower profits blamed the rising cost of materials.








Three percent of owners reported that all their borrowing needs were not satisfied, unchanged.  Thirty-two percent reported all credit needs met (up 2 points) and 47 percent said they were not interested in a loan, down 5 points, an indicator that loan demand may pick up.  Five percent reported their last loan was harder to get than the previous one, up 1 point but historically low.



Two percent reported that financing was their top business problem (unchanged) compared to 19 percent citing taxes, 13 percent citing regulations and red tape, and 25 percent the availability of qualified labor.  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 rose 2 points to 19 percent, the highest since 2007 prior to the Federal Reserve taking control of rates.  The Federal Reserve is raising its rates, and market rates are rising, although reluctantly.   Higher interest rates will not deter much investment as long as the economy grows, promising a good return on investment spending.



Thirty-two percent of all owners reported borrowing on a regular basis (unchanged).  The average rate paid on short maturity loans fell 30 basis points to 6.1 percent.  Overall, credit markets have been very supportive of growth and will not likely become an impediment for the next few quarters.





The general consensus among forecasters is that the fourth quarter will be solid but slower.  Some feel that growth peaked early this year and will slow as we move into 2019.  There are a number of reasons, primarily structural, for a slowdown including a lack of qualified workers to fill open positions and a low rate of labor force growth.  The Congressional Budget Office calculates our Potential GDP and its prospective growth path annually.  In simple terms, potential growth (with no inflation) is determined by labor force growth and productivity growth.  The dramatic decline in investment and labor force growth in 2008 and in the following years significantly altered the potential growth of the economy and its potential growth path.  Each year that actual GDP was below its potential future potential GDP growth shrunk, as capital spending did not add enough to capacity and the labor force participation rate fell.  Thus, although our GDP growth finally caught up with Potential in early 2018, it was at a much lower level of potetial growth (see chart, thanks Prof, Lew Spellman, Univ of Texas)


So, we are at “full employment” now, but at a lower growth level of GDP than was possible in 2007 or subsequent years because capacity shrunk due to low investment and labor force growth.  Based on current estimates for labor force growth and productivity improvement (technology and investment), our future growth will be constrained to be lower than in the pre-2008 period.


Spending (supported by increased government outlays, tax cuts, reduced regulatory costs, a lower saving rate and solid employment gains) has eliminated excess capacity and now growth depends on increasing labor force growth and  participation, and productivity gains (through training and investment in new capital).  Reports of unfilled job openings and few qualified job applicants are at record levels.  Owners report raising compensation at record rates to attract new workers.  While all of this helps, it will not be sufficient to quickly restore potential growth to higher paths that were eliminated by slow growth in 2008-2016.  Small business employs about half of the private workforce, so investment and training in that sector is critical to improving overall worker productivity over the next 5 years.  In the meantime, continued spending demand will put pressure on capacity and prices, keeping the Federal Reserve ready to raise interest rates to try to keep demand from outstripping our capacity to produce which would produce more inflation.



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NFIB began surveys of its membership in October 1973.  Surveys were conducted in the first month of each quarter through 198OW5 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.