Embargoed Tuesday, JANUARY 8 at 6 a.m.
(Based on 621 respondents to the DECEMBER survey of a random sample of
NFIB’s member firms, surveyed through 12/28/18)
The Small Business Optimism Index was basically unchanged in December, drifting down 0.4 points to 104.4. Job openings set a new record high, job creation plans strengthened, and inventory investment plans surged. On the downside, expected real sales growth and expected business conditions in six months accounted for the decline in the Index. Reports of higher worker compensation stayed near record levels, while reports of higher selling prices faded. Credit availability was not an issue.
Over the past few months, owners’ expectations for the future have tempered, while reporting continued solid economic activity. Expectations have come down from the stratosphere to more normal levels but still at historically solid readings. The net percent expecting better business conditions in six months has declined 18 percentage points since August when the Index reached a record high. The percent viewing the current period as a good time to expand has declined 10 points. But actual hiring has strengthened to the highest reading in six months, job openings are at a record high, and plans to create new jobs are down only 3 points from its record high in August. Actual capital outlays are 5 percentage points higher than in August, although plans for outlays are 8 points below the high for this expansion. Plans to invest in inventories are only 2 points below August, the record high. Satisfaction with inventories is 2 points better. The Index remains at historically high levels but can’t be expected to improve every month. Good economic growth is just fine for an economy at full employment.
[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 December with a net addition of 0.25 workers per firm (including those making no change in employment), up from 0.19 in November and the best reading since July. Fifteen percent (down 1 point) reported increasing employment an average of 3.0 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted).
Sixty percent reported hiring or trying to hire (unchanged), but 54 percent (90 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (up 1 point). “Qualified” includes specific work-related skills but also covers poor appearance, attitude, social skills, and unreasonable wage expectations as well as poor work history. Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, down 2 points from last month’s record high reading.
Thirty-nine percent of all owners reported job openings they could not fill in the current period, up 5 points and a new record high. Labor markets are still exceptionally tight. Thirteen percent reported using temporary workers (down 1 point). In construction, 49 percent reported open positions and 42 percent in manufacturing (both not seasonally adjusted). If filled, even more output would be produced, and the unemployment rate would drop further.
A seasonally-adjusted net 23 percent plan to create new jobs, up 1 point from November’s reading. Not seasonally adjusted, 23 percent plan to increase total employment at their firm (up 1 point), and 5 percent plan reductions (down 2 points). Job creation plans were strongest in construction (net 27 percent) and professional services (net 38 percent).
However, with labor markets tight for both skilled and unskilled workers, it will be difficult to fulfill those plans. Thirty-three percent have openings for skilled workers and 12 percent have openings for unskilled labor. Thirty-three percent reported few qualified applicants for their open positions and 21 percent reported none!
It is frustrating to have the potential to sell and produce more but be unable to hire the workers needed. With taxes cut and deregulation, finding qualified workers remains the top problem facing business owners. A successful hire in this market is likely to create a job vacancy elsewhere because the labor force is not growing quickly enough to satisfy demand. Overall, a good measure to watch is initial claims for unemployment benefits. If it starts rising steadily, it is a sign that spending is weakening and labor is being released. Hopefully, seasonal adjustments give a reasonably accurate picture of this process! Winter does slow economic activity in large parts of the country.
The percent of business owners reporting that they increased employee compensation continued at 45-year record high levels. A net 35 percent reported higher compensation in December, and a net 24 percent planned increases in the next three months (down 1 point), predicting further gains in wages and benefits.
Labor force growth has now become a serious constraint on growth in the economy. With a million more job openings than people wanting a job, it is a great environment for workers, with wages rising and lots of job alternatives to choose from. The labor force participation rate remains well below its pre-2008 levels, and retirement doesn’t explain all of that reduction.
Sixty-one percent reported capital outlays, unchanged from November. Of those making expenditures, 42 percent reported spending on new equipment (down 3 points), 25 percent acquired vehicles (up 3 points), and 15 percent improved or expanded facilities (down 3 points). Six percent acquired new buildings or land for expansion (down 2 points) and 15 percent spent money for new fixtures and furniture (unchanged).
Twenty-five percent plan capital outlays in the next 3 to 6 months, down 4 points. Plans to invest were most frequent in professional services (50 percent), the wholesale trades (35 percent), and construction (30 percent). Expansion is attractive in a growing economy but only if the workers needed to use the new capital and facilities are available. A new snowplow with no driver is of no value to the firm.
A net 4 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 5 points from November’s very strong reading. The net percent reporting higher sales averaged 2 percent in 2017 but 9 percent in 2018, with a peak value of 15 percent. Demand (sales) was exceptionally strong. Thirty percent or more of the owners in construction, transportation, and finance reported quarterly improvements in sales. Consumer spending remained strong, a good holiday season.
The net percent of owners expecting higher real sales volumes fell 1 point to a net 23 percent of owners, a solid reading. Consumer spending has remained good, and small manufacturing and construction firms cannot find enough employees to fill their open positions, selling all they can produce without more workers.
The net percent of owners reporting inventory increases fell 3 points to a net 3 percent (seasonally adjusted), following November’s strong showing, the second-best since 2005. 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” gained 4 points to a net negative 1 percent, a very “lean” reading, no surprise given the strength of consumer spending in the last months of 2018. In response, the net percent of owners planning to add to stocks rose 6 points to a strong 8 percent of owners.
The net percent of owners raising average selling prices rose 1 point to a net 17 percent, seasonally adjusted. Unadjusted, 11 percent (unchanged) reported lower average selling prices and 24 percent (unchanged) reported higher average prices. Forty-eight percent of the firms in the wholesale trades reported raising prices (9 percent reduced), and 29 percent of the construction and retail firms hiked prices (4 and 13 percent reduced). In agriculture, 31 percent reported lower average prices (11 percent raised).
Seasonally adjusted, a net 25 percent plan price hikes (down 4 points). This indicates that there is little inflation pressure coming from Main Street. With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices as profit performance faded a bit.
COMPENSATION AND EARNINGS:
Reports of higher worker compensation rose 1 point to a net 35 percent of all firms. Plans to raise compensation fell 1 point to a net 24 percent, just below the November reading, which was the highest since 1989.
Owners complain at record rates about labor quality issues, with 90 percent of those hiring or trying to hire in December reporting few or no qualified applicants for their open positions. Twenty-three percent (down 2 points from November’s 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 3 points to a net negative 7 percent reporting quarter on quarter profit improvements, furthering a weakening trend that started after the record high reading in August. One-third of those reporting weaker profits blamed sales, only 4 percent blamed labor costs, and 21 percent usual seasonal change. For those reporting higher profits, 61 percent credited sales volumes, unchanged from November. Less than 10 percent of owners credited changing prices (up or down) for the results.
Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point but historically very low. Thirty-two percent reported all credit needs met (unchanged) and 50 percent said they were not interested in a loan, up 3 points. Five percent reported their last loan was harder to get than the previous one, unchanged and historically low.
Three percent reported that financing was their top business problem (up 1 point) compared to 13 percent citing taxes (down 6 points), 14 percent citing regulations and red tape, and 23 percent the availability of qualified labor. The percent of owners reporting paying a higher rate on their most recent loan rose 5 points to 24 percent, the highest since 2007 prior to the Federal Reserve taking control of interest rates.
Thirty-five percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 30 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:
Critics of the Federal Reserve are popping up everywhere. They say that the Federal Reserve is not paying attention to “what financial markets are telling” us about the economy. However, the stock market does not reflect the entire economy. The small business sector represents the other half and it continues its two-year run of record high performance levels, an important consideration. Critics have forgotten what impact zero interest rates have had. If investors can’t earn anything in bonds or savings accounts, they put their money into stocks and real estate, bidding up those prices. When interest rates start to normalize (i.e. rise), other investment options become more attractive.
The price of shares of stock in a company reflect the earnings the company is expected to make. The price of the share multiplied by the number of shares outstanding is the value of the company. Similarly, the value of our stock markets collectively reflect the value of the production of all of our publicly traded companies taken together. But again, that is not the full picture. Small businesses are not represented in the currently volatile stock market. In fact, small businesses have reported sales and earnings growth at record levels over the past 2 years and December’s report shows continued high levels of economic growth in the small business sector.
Share prices for publicly traded companies have not been connected to reality for some time, thanks to the Federal Reserve artificially holding interest rates down for so many years. Since 2008, the S&P stock index has risen 110 percent, but US output, measured by GDP, has increased only 25 percent over the same period. The growth in output owned by each share has lagged far behind the share price. So, as interest rates rise, bonds provide an attractive alternative to owning stocks and stock prices will weaken as investment money shifts to bonds.
Since the economy took off after the election, there have been two themes promoted by the press: (1) the economy is going to overheat and cause inflation and (2) the economy is slowing and the Federal Reserve should not raise interest rates. Over that period, the NFIB surveys of the “small business” half of the economy have shown that there was and is no inflation threat and now shows that in spite of the gloom and doom in the press, Main Street remains historically very strong, setting record levels of hiring along the way.
So, yes interest rates will rise and no, the Federal Reserve should not abandon its policy simply because the stock market is volatile. Normalizing interest rates means normalizing asset prices. Much of the “real” economy is at record high levels for this expansion. The Federal Reserve does want to get as far away from “0” interest rates as it can in anticipation of needed cuts in the future. But it will not do this by risking a recession. At full employment, the best they can do without pushing inflation is to keep the economy steady at its current high level of employment.
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.