February 2015 Report: Small Business Optimism Rises Despite Falling Sales Trends

The Index of Small Business Optimism gained 0.1 points to reach 98.0, the long-term average including the Great Recession and the third highest reading since early 2007. Only eclipsed by November and December 2014 which were a bit higher. Of the ten Index components, the largest gain was in the percent of owners reporting hard-to-fill openings (3 points).

Changes were smaller in other components, 2 point increase for inventory investment plans, negative 2 points for job creation plans, and less for the other components. Overall, not a lot of movement in the overall Index or in the components. 

Fifty-three percent reported hiring or trying to hire (up 5 points), but 47 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent reported using temporary workers, down 2 points. A net 12 percent planning to create new jobs, down 2 points but a solid reading. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006. Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months. 

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months retreated 3 points, falling to a net negative 6 percent. After a 5 point decline in January, this indicator has returned to the low for 2014 reached in March of last year. Expected real sales volumes posted a 1 point decline, falling to a net 15 percent of owners expecting gains, after a 4 point decline in January. Sales prospects are still looking reasonably good to owners, just not as hot as in the fourth quarter last year.

The pace of inventory change remained positive, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from January. Owners are building inventory. This is the fourth non- negative month in a row, and the first string of positive numbers since early 2007. The net percent of owners viewing current inventory stocks as “too low” deteriorated 1 point to a net negative 2 percent, historically a fairly “satisfied” reading. The net percent of owners planning to add to inventory stocks rose 2 points to 4 percent, a very solid reading. If businesses accumulate inventory faster than spending rises in Q1, this will depress growth in 2015 Q2 if owners pull back on inventory investment. 

Sixty percent reported outlays, up 1 point from January and the strongest reading since October 2007. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 26 percent, the third best reading for this expansion but still weak historically. Of the 43 percent of owners who said it was a bad time to expand, 23 percent still blamed the political environment (up 4 points). The net percent of owners expecting better business conditions in six months dropped 1 point to a net negative 1 percent. A net 15 percent of all owners expect improved real sales volumes, down 1 point after a 4 point decline in January. Still good readings for this expansion, but historically not so hot. 

Earnings trends were unchanged at a net negative 19 percent (net percent reporting quarter to quarter earnings trending higher or lower). After surging in December, reports of increased labor compensation dropped 5 percentage points to a net 20 percent of all owners. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. Four percent reported reduced worker compensation and 26 percent reported raising compensation. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (up 2 points). The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations including the healthcare law. 

Three percent of owners reported that all their credit needs were not met, holding at an historic low level. Thirty-three percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem (up 1 point) Thirty percent of all owners reported borrowing on a regular basis, down 3 points. The average rate paid on short maturity loans fell 20 basis points to 5.1 percent. Loan demand remained historically weak. The improved optimism and plans to hire and spend over the past 4 months have not triggered a surge in owners’ willingness to borrow and make a bet on the future. The net percent of owners expecting credit conditions to ease in the coming months was a negative 4 percent, a 1 point improvement. 

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