February 2019 Report: Small Business Optimism Index Optimism Stabilizes Among Small Business Owners
Job creation broke the 45-year record in February with a net addition of 0.52 workers per firm (including those making no change in employment), up from 0.25 in December, and 0.33 in January. The previous record was 0.51 reached in May 1998.
The NFIB Small Business Optimism Index improved modestly in February, increasing 0.5 points to 101.7. Views about future business conditions and the current period as a good time to expand improved as did plans to make capital outlays. Earnings trends weakened, as a million laid off workers and others affected by the shutdown cut back on spending. The loss of sales falls right to the bottom line. Worker compensation and selling prices were lower in February than they were in January, but job openings rebounded remaining at historically high levels. The Uncertainty Index fell 1 point to 85, a small decline but still showing a lot of residual uncertainty from the government shutdown.
“Small business owners are thankful to have the government shutdown in the rear view mirror but need more certainty about the future,” said NFIB President and CEO Juanita D. Duggan. “Small businesses put their money where their expectations are as we’ve seen when they get tax and regulatory relief. The best thing Washington can do for the small business half of the economy is to continue the policies – tax cuts and deregulation – that leave them with more resources to invest and find qualified workers.”
Small business owners who expect better business conditions improved five percentage points and those viewing the current period as a good time to expand increased two points in February. Twenty-seven percent plan capital outlays in the next few months, up one point. Plans to invest were most frequent in wholesale trades (43 percent), manufacturing (39 percent), construction (32 percent), and agriculture (31 percent).
“Owners still want to grow and expect they could sell more if they could hire employees to produce more. Small businesses want to expand in this growing economy but only if they can find qualified applicants for their open positions,” said NFIB Chief Economist Bill Dunkelberg. “On the positive side, now that the government is funded, owners should be getting back to business with the rebound in consumer sentiment.”
The frequency of reports of positive profit trends fell four points to a net negative nine percent reporting quarter on quarter profit improvements, the weakest reading since 2017. Forty-one percent of those reporting weaker profits blamed sales, 22 percent cited lower selling prices, and nine percent blamed labor costs. For those reporting higher profits, 50 percent credited sales volumes. Thirty-three percent credited higher prices for the results. The cost of materials was not an issue.
The net percent of owners raising average selling prices fell two points to a net 13 percent, seasonally adjusted. Unadjusted, ten percent (unchanged) reported lower average selling prices and 23 percent (down one point) reported higher average prices. Seasonally adjusted, a net 26 percent plan price hikes (down one point). With some sales weakness and concerns about the economy, likely fewer than half will actually post price hikes.
As reported in February’s NFIB Jobs Report, job creation among small businesses broke the 45-year record in February with a net addition of 0.52 workers per firm. The previous record was in May 1998 at 0.51 workers per firm. The percent of owners citing labor costs as their most important problem also hit an all-time high, with 10 percent of owners reporting labor costs as their biggest problem. Reports of higher worker compensation fell five points to a net 31 percent of all firms. Uncertainty is not conducive to making permanent compensation commitments.
LABOR MARKETS
Job creation broke the 45-year record in February with a net addition of 0.52 workers per firm (including those making no change in employment), up from 0.25 in December, and 0.33 in January. The previous record was 0.51 reached in May 1998. Twelve percent (down 3 points) reported increasing employment an average of 3.2 workers per firm and 3 percent (down 4 points) reported reducing employment an average of 3.1 workers per firm (seasonally adjusted), the lowest percentage of owners reporting reductions in survey history. Owners are trying to hold on to the employees they have. Fifty-seven percent reported hiring or trying to hire (up 1 point), but 49 percent reported few or no qualified applicants for the positions they were trying to fill (unchanged). Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, only 3 points below the record high. Thirty-seven percent of all owners reported job openings they could not fill in the current period, up 2 points from January and 2 points below the record high. Fourteen percent reported using temporary workers (up 1 point). In transportation, 56 percent reported open positions, 49 percent in construction, and 43 percent in manufacturing. A seasonally-adjusted net 16 percent plan to create new jobs, down 2 points from January’s reading. Job creation plans were strongest in construction (net 42 percent) and manufacturing (net 28 percent).
SALES AND INVENTORIES
A net negative 1 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, a 5 point decline. Retail sales fell sharply in December and January, no surprise with a million workers laid off with no pay. The net percent of owners expecting higher real sales volumes was unchanged at a net 16 percent of owners, a solid reading but 7 points below December. For perspective, in the 12 months prior to the 2016 election results, the average was a net -3 percent.
The net percent of owners reporting inventory increases fell 5 points to a net 2 percent (seasonally adjusted), a logical result of the sharp decline in retail sales as owners tried to reduce inventories. The net percent of owners viewing current inventory stocks as “too low” gained 1 point to a net negative 2 percent, suggesting that inventories are still viewed as a bit excessive, but not as much as in January. The percent of owners planning to expand inventory stocks was unchanged at a net 1 percent after a decline of 7 points from December.
CAPITAL SPENDING
Fifty-eight percent reported capital outlays, down 2 points. Of those making expenditures, 43 percent reported spending on new equipment (unchanged), 28 percent acquired vehicles (up 2 points), and 17 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (down 1 point) and 14 percent spent money for new fixtures and furniture (down 1 point). Twenty-seven percent plan capital outlays in the next few months, up 1 point. Plans to invest were most frequent in wholesale trades (43 percent), manufacturing (39 percent), construction (32 percent), and agriculture (31 percent).
INFLATION
The net percent of owners raising average selling prices fell 2 points to a net 13 percent, seasonally adjusted. Firms in the wholesale trades most frequently reported raising their average prices (net 47 percent). Price hikes were much less frequent in other industry groups. Seasonally adjusted, a net 26 percent plan price hikes (down 1 point). The percent planning hikes is above 30 percent in construction, manufacturing, transportation, wholesale, and retail trades.
COMPENSATION AND EARNINGS
Reports of higher worker compensation fell 5 points to a net 31 percent of all firms. Plans to raise compensation fell 2 points to a net 18 percent, suggesting some slowing in compensation gains as job creation plans faded a bit. Twenty-two percent (3 points below November’s record high) selected “finding qualified labor” as their top business problem, indicating that firms are likely to continue to offer higher compensation to attract and retain qualified workers. The frequency of reports of positive profit trends fell 4 points to a net negative 9 percent reporting quarter on quarter profit improvements, the weakest reading since 2017. Forty-one percent of those reporting weaker profits blamed sales, only 9 percent blamed labor costs, and 22 percent cited lower selling prices. For those reporting higher profits, 50 percent credited sales volumes. Thirty-three percent credited higher prices for the results. The cost of materials was not an issue.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically very low. Thirty-four percent reported all credit needs met (up 1 point) and 51 percent said they were not interested in a loan, up 2 points. Six percent reported their last loan was harder to get than the previous one, up 2 points but historically low. Two percent reported that financing was their top business problem (unchanged). The percent of owners reporting paying a higher rate on their most recent loan fell 3 points to 17 percent, after falling 4 points in January. Thirty-three percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans fell 70 basis points to 6.2 percent.
COMMENTARY
By December, nearly a million government workers knew they would very likely be laid off and not paid. Even though there was an expectation that they would receive back pay, the uncertainty was “when?”. In the meantime, with NO cash coming in, these consumers pulled back from the holiday exuberance and cut spending. Beyond that, thousands of government contractors were not paid and so their employees were laid off, with no prospect of “back pay.” Add to that the uncertainty produced by the long shutdown, it is no surprise that there was a significant deceleration in consumer spending in December, the largest one month drop since 2009. Consumer optimism did rebound from the shutdown’s depressed January reading. Manufacturing sector indicators have become much more positive. The NAHB Homebuilders Index is up two months in a row; housing starts and permits are picking up. Overall, it appears that small business is getting back to business.
But, there are still uncertainties, such as those created by current changes in trade policies. Asked if recent trade policies had impacted their businesses, 28 percent replied “somewhat negatively” and 9 percent reported a “significant negative effect.” Only 5 percent reported a positive effect. Responses varied by industry, with 64 percent of the firms in agriculture reporting a negative impact, 57 percent in the wholesale trades, and 41 percent each in manufacturing and construction. Tariffs are mostly paid by consumers, as these costs work their way through supply chains to the final purchaser. The hope is that these costs will be investments in reformed trading arrangements.
