December 2014 Report: Small business optimism perks up in December

Bill Dunkelberg



The Small Business Optimism Index gained 2.0 points, taking the Index to its highest level since February 2007. The average of the Index from 1974Q4 to 2014 to date is 98, which includes all the Great Recession readings. What didn’t improve were the four “hard” Index components: job creation plans, plans for capital outlays, job openings and inventory investment plans, together adding a negative 1 percentage point to the Index. The entire gain in the Index was accounted for by two components: Expectations for Business Conditions in Six Months and Expectations for Real Sales Volumes, adding a combined 21 percentage points to net favorable responses, perhaps a response to the November election results. 


The percent of owners reporting job creation fell a point from October to a net 2 percent of owners, continuing a four month run in positive territory. Overall, the average increase in workers per firm was 0.05 workers per firm, up from 0 in October, positive even if small. Twelve percent report increasing employment an average of 3.6 workers while 10 percent reduced their workforce by an average of 3.3 workers (seasonally adjusted). Fifty-three percent reported hiring or trying to hire, but 45 percent reported few or no qualified applicants for the positions they were trying to fill. Fifteen percent reported using temporary workers, up 1 point. Twenty-four percent of all owners reported job openings they could not fill in the current period, unchanged from October and a historically solid reading. Job creation plans improved 1 point to a seasonally adjusted net 11 percent. 


The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months fell 1 point to a net negative 4 percent, a rather poor picture and inconsistent with the rise in optimism – bottom line, it is customers that bring joy and improve optimism. Twelve percent cited weak sales as their top business problem, one of the lowest readings since December, 2007, unchanged from October. Expected real sales volumes posted a 5 point gain, rising to a net 14 percent of owners expecting gains.

The pace of inventory reduction shifted to a modest investment position, with a net 1 percent of all owners reporting growth in inventories (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 3 percent, suggesting that stocks are excessive relative to sales expectations. The net percent of owners planning to add to inventory stocks fell 1 point to a net 2 percent, positive but not very strong in light of the improved sales expectations. 


Fifty-seven percent reported outlays, 1 point better than October. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 25, a strong reading in this mediocre expansion, but historically weak. Of the 53 percent of owners who said it was a bad time to expand (down 5 points), 19 percent (down 9 points) blamed the political environment, a sign of some optimism growing from the election results. The net percent of owners expecting better business conditions in 6 months rose16 percentage points to a net 13 percent, a huge gain perhaps related to the election outcome. A net 14 percent of all owners expect improved real sales volumes, up 5 points. A nice rebound in expectations, not yet translated into plans for more capital spending. 


Seasonally adjusted, the net percent of owners raising selling prices was 4 percent, down 4 points. There are no inflation pressures coming from Main Street. Twenty-three percent plan on raising average prices in the next few months (unchanged). Seasonally adjusted, a net 19 percent plan price hikes (down 1 point). The percent of owners reporting price declines is far higher than the percent planning reductions in the preceding months, by a factor of roughly 5 times. In October, 4 percent were planning reductions and in November 15 percent reporting actual reductions, suggesting little pricing power and the need to cut prices to keep or attract customers. 


Earnings trends improved 3 percentage points, reaching a net negative 17 percent. Sales are not improving substantially and labor costs continue to put pressure on the bottom line but energy prices are down a lot. That helps, but it is clear that firms are not able to pass their cost increases, primarily compensation, on to customers through higher prices. Two percent reported reduced worker compensation and 22 percent reported raising compensation (up 1 point), yielding a seasonally adjusted net 21 percent reporting higher compensation, up 2 points. A seasonally adjusted net 15 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. 


Four percent of the owners reported that all their credit needs were not met, holding at the historic low. Twenty-nine percent reported all credit needs met, and 54 percent explicitly said they did not want a loan. Only 3 percent reported that financing was their top business problem. Thirty- three percent of all owners reported borrowing on a regular basis, up 5 points and high compared to recent experience. The average rate paid on short maturity loans increased 10 basis points to 5.6 percent. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 6 percent; 1 point worse than October. 


Last month, we asked if the election outcome would matter to small business owners, planning to look for evidence in the November survey results which are mailed in over the entire month. It clearly had no impact on hiring and spending plans, these were unchanged from October numbers. But expectations did improve, with a 16 percentage point gain in expectations for better business conditions in 6 months and a 5 point gain in expectations for higher real sales in the coming months, likely not a response to “Black Friday” or “Small Business Saturday” results.

Responses to the question “Is now a good time to expand your business substantially?” might also be a result of election euphoria. The percent responding NO fell 5 percentage points to 53 percent, nice, but not the lowest reading in 2014. However, the percent of those saying NO and blaming the “political climate” fell from 28 percent of those who said NO to 19 percent, a significant decline and the lowest since January, 2012. The high reading was 37 percent in October, 2013. So it appears likely that the election outcome played a significant role in improving the Index of Small Business Optimism, but only two of the ten Index components appeared to be impacted. What is needed is a translation of this optimism into spending and hiring.

Third quarter real GDP growth was revised up to 3.9 percent making the 6 months in the middle of 2014 one of the best growth periods in decades. However, this didn’t do much for small business job creation in the U.S. One reason is that a lot of this growth has been driven by inventory building, unusual defense outlays and exports, selling around the world, an activity that doesn’t involve many small businesses. Expectations for growth in the fourth quarter are not as rosy, reverting to the high 2 percent pace.

A new round of healthcare events will impact business owners in the coming months and consumers will find that their out of pocket outlays for healthcare will be rising because their policies have high deductibles. Just what impact this will have on spending remains to be seen. 


This survey was conducted in November 2014. A sample of 3,938 small-business owners/members was drawn. Six hundred and eight (615) usable responses were received – a response rate of 16 percent. 

Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.

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