August 2018 Report: Small Business Optimism Index Small Business Optimism Shatters Record Previously Set 35 Years Ago
A net 10 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, up two points. August is the ninth consecutive strong month of reported sales gains after years of low or negative numbers.
The NFIB Small Business Optimism Index soared to 108.8 in August, a new record in the survey’s 45-year history, topping the July 1983 highwater mark of 108. The record-breaking figure is driven by small business owners executing on the plans they’ve put in place due to dramatic changes in the nation’s economic policy.
The August survey showed:
- Job creation plans and unfilled job openings both set new records.
- The percentage of small business owners saying it is a good time to expand tied the May 2018 all-time high.
- Inventory investment plans were the strongest since 2005 and capital spending plans the highest since 2007.
“Today’s groundbreaking numbers are demonstrative of what I’m hearing everyday from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans,” said NFIB President and CEO Juanita D. Duggan. “We’re now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings, and hiring.”
A net 10 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, up two points. August is the ninth consecutive strong month of reported sales gains after years of low or negative numbers. The net percent of owners planning to build inventories rose six points to a record net 10 percent, the 14th positive reading in the past 22 months. The frequency of reports of positive profit trends rose two points to a net one percent reporting quarter on quarter profit improvements, the second highest reading in the survey’s 45-year history.
“At the beginning of this historic run, Index gains were dominated by expectations: good time to expand, expected real sales, inventory satisfaction, expected credit conditions, and expected business conditions,” said NFIB Chief Economist Bill Dunkelberg. “Now the Index is dominated by real business activity that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans, and earnings. Small business is clearly helping to drive that four percent growth in the domestic economy.”
As reported in last week’s NFIB’s monthly jobs report, a seasonally adjusted net 26 percent of owners plan to create new jobs and 38 percent of owners reported job openings they could not fill in the current period, both survey highs. Sixty-two percent of owners reported trying to hire, with 89 percent of those owners reporting few or no qualified applications for their open positions. A record 25 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, up two points from last month.
The report concludes, “As a leading indicator of economic activity, the Index turned up sharply late in November 2016 and headed to readings in the top 5 percent of the Index history in December, never looking back. Three months later, economic activity soared, rising from 1.5 percent GDP growth to over 3 percent. Profits are driving the stock indices for ‘small’ firms to record levels, mirroring the record levels of profit gains for NFIB firms.”
LABOR MARKETS
After posting significant gains in employment in July, job creation slowed among small firms in August, perhaps because there were fewer workers available to hire because job openings hit a 45 year record high. Fifteen percent (down 2 points) reported increasing employment an average of 3.2 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.4 workers per firm (seasonally adjusted). Sixty-two percent reported hiring or trying to hire (up 3 points), but 55 percent (up 3 points and 89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. A record 25 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points). Thirty-eight percent of all owners reported job openings they could not fill in the current period, a new survey record high. Seventeen percent reported using temporary workers, up 4 points. A seasonally-adjusted net 26 percent plan to create new jobs, up 3 points from July and a survey record. Thirty-five percent have openings for skilled workers (up 2 points), and 16 percent have openings for unskilled labor, up 1 point.
SALES AND INVENTORIES
A net 10 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, up 2 points and a very good number. Over 35 percent of the owners in construction, manufacturing, the wholesale trades and transportation reported sales volumes gains. They are booming. The net percent of owners expecting higher real sales volumes fell 3 points to a net 26 percent of owners, still a strong reading.
The net percent of owners reporting inventory increases was unchanged at a net 4 percent (seasonally adjusted). Net additions to the stock of inventory for all firms adds to GDP growth. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 3 percent. The net percent of owners planning to build inventories rose 6 points to a record net 10 percent, the fourteenth positive reading in the past 22 months.
CAPITAL SPENDING
Fifty-six percent reported capital outlays, down 3 points from July. Of those making expenditures, 39 percent reported spending on new equipment (down 3 points), 22 percent acquired vehicles (down 3 points), and 18 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (unchanged) and 15 percent spent money for new fixtures and furniture (up 2 points). Overall, August showed a weaker investment spending picture even though prospects for the economy remain strong. Thirty-three percent plan capital outlays in the next three to six months, up 3 points and the best since 2007.
INFLATION
The net percent of owners raising average selling prices rose 1 point to a net 17 percent, seasonally adjusted. The net percent of firms raising price was negative in each of the first three quarters of 2016, averaging -2 percent. In the fourth quarter it was 2 percent, and has marched steadily upward ever since. Seasonally adjusted, a net 24 percent plan price hikes (unchanged). With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices.
COMPENSATION AND EARNINGS
Reports of higher worker compensation remained unchanged at a net 32 percent of all firms, 3 points shy of May’s record reading of 35 percent. Plans to raise compensation fell 1 point to a net 21 percent, historically strong. Owners complain at record rates about labor quality issues, with 89 percent of those hiring or trying to hire in August reporting few or no qualified applicants for their open positions. Twenty-five percent (up 2 points) selected “finding qualified labor” as their top business problem, more than cited taxes, weak sales, or the cost of regulations as their top challenge. The frequency of reports of positive profit trends rose 2 points to a net 1 percent reporting quarter on quarter profit improvements, the second highest reading in the survey’s 45 year history. May 2018 holds the record of a net 3 percent.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and just 1 point above the record low. Thirty-three percent reported all credit needs met (up 1 point) and 51 percent said they were not interested in a loan, up 1 point. Two percent reported that financing was their top business problem (unchanged). Five 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 unchanged at 17 percent, the highest reading since February 2007. Thirty-two percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans fell to 6.1 percent (down 20 basis points).
COMMENTARY
Stock indices are hitting new highs as the economy keeps producing good numbers. New heights of small business optimism contradicts the convential storyline that the recovery is losing stream, that we should prepare ourselves for the downturn. Worriers focus on the role of FAANG stocks driving the market higher. But recently, the Russell 2000, a “small company” stock index began posting record gains as well, based on very favorable profit reports for small businesses. The “small cap” companies in the Index are much larger than NFIB members, but their experience mirrors the record reports of rising profits among NFIB members. The small business engine continues to roar with the dramatic change in economic policies since November 2016.
In December 2016, the Index jumped 8 points to 105.7, virtually equal to its average reading since then of 105.8. At the beginning of this historic run, the Index gains were dominated by expectations: good time to expand, expected real sales, and expected business conditions. Now the Index is dominated by stuff that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans, and, earnings. Small business is clearly helping to drive that “4 percent growth” in the domestic economy.
Credit is not a problem, few report being unable to meet their financing needs. The Ten Year Treasury yield did hit 3 percent, a rate typically used by small business lenders as the base for loan interest rates. And, the Federal Reserve is expected to tack on another 50 basis points by year end. Mortgage rates may be affecting the housing market, although the inability of builders to increase housing supply and the asociated rise in house prices are probably a bigger problem for our construction firms who can’t hire the workers they need.
Politics, rather that the strong economy and low unemployment, will continue to dominate the news. But this is not likely to have much of an impact on the level of economic activity which is on course to equal or surpass last quarter’s performance.
