January 2019 Report: Small Business Optimism Index Small Business Optimism Returning to Normal Levels as Owners Express Uncertainty about the Future

February 17, 2019

Small businesses added a net 0.33 workers per firm, the best reading since July 2018, with 15 percent of owners increasing employment an average of 3.1 workers per firm. Sixty percent reported capital outlays, just one point below December.

The NFIB Small Business Optimism Index slipped 3.2 points in January, as owners continued hiring and investing, but expressed rising concern about future economic growth. The 101.2 reading, the lowest since the weeks leading up to the 2016 elections, remains well above the historical average of 98, but indicates uncertainty among small business owners due to the 35-day government shutdown and financial market instability. The NFIB Uncertainty Index rose seven points to 86, the fifth highest reading in the survey’s 45-year history.

“Business operations are still very strong, but small business owners’ expectations about the future are shaky,” said NFIB President and CEO Juanita D. Duggan. “One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”

Key takeaways from the January Index were:

Hiring, hiring plans, and job openings remained strong.
Inventory spending and capital spending were solid.
Owners expressed concerns about future sales growth and business conditions later in the year.
There was some deterioration in conditions that would support business expansion.

“Although January’s index showed some positive developments among current business conditions, the return to divided government in Washington created an inability to agree on basic policy measures,” said NFIB Chief Economist Bill Dunkelberg. “This produced the longest partial government shutdown in history, elevating the level of uncertainty, which is damaging to economic activity.”

The net percent of owners reporting inventory increases rose four points to a net seven percent (seasonally adjusted), matching February 2018 and the strongest since April 2000. However, the net percent of owners viewing current inventory stocks as “too low” lost two points, historically a favorable reading but a little less comfortable than in 2018. The percent of owners planning to expand inventory stocks fell seven points from exceptionally high levels to one percent of owners.

A net four percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged, solid, but the lowest reading in a year. The net percent reporting higher sales averaged two percent in 2017 but eight percent in 2018, with a peak value of 15 percent. The net percent of owners expecting higher real sales volumes fell seven points to a net 16 percent of owners.

As reported in January’s NFIB Jobs Report, reports of higher worker compensation rose to the second highest level in the survey’s history to a net 36 percent of all firms. In 2018, nationwide wages increased 3.2 percent. Small business owners continue to hire at record levels, with 56 percent of owners reported hiring or trying to hire. However, 88 percent of those owners reported few or no qualified applicants for the positions.

Twenty-three percent of small business owners reported the availability of qualified labor as their top business problem compared to 15 percent citing taxes (up two points), 12 percent citing regulations and red tape, and two percent citing financing (down one point).

LABOR MARKETS

Job creation was solid in January with a net addition of 0.33 workers per firm (including those making no change in employment), up from 0.25 in December, affirming the outsized job number reported by the Department of Labor and the best reading since July 2018. Fifteen percent (unchanged) reported increasing employment an average of 3.1 workers per firm and 7 percent (down 3 points) reported reducing employment an average of 3.0 workers per firm (seasonally adjusted). Fifty-six percent reported hiring or trying to hire (down 4 points), but 49 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (down 2 points). Twenty-three percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, unchanged from last month and 2 points below the record high. Thirty-five percent of all owners reported job openings they could not fill in the current period, down 4 points from December’s record high. Thirteen percent reported using temporary workers (unchanged). A seasonally-adjusted net 18 percent plan to create new jobs, down 5 points from December’s reading. Twenty-nine percent have openings for skilled workers and 12 percent have openings for unskilled labor. But 29 percent of owners reported few qualified applicants for their open positions and 20 percent reported none.

SALES AND INVENTORIES

A net 4 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged, solid, but the lowest reading in a year. The net percent reporting higher sales averaged 2 percent in 2017 but 8 percent in 2018, with a peak value of 15 percent. The net percent of owners expecting higher real sales volumes fell 7 points to a net 16 percent of owners. For perspective, in the 12 months prior to the 2016 election, the average was -3.0.

The net percent of owners reporting inventory increases rose 4 points to a net 7 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” lost 2 points to a net negative 3 percent, historically a favorable reading but a little less comfortable than in 2018. The percent of owners planning to expand inventory stocks fell 7 points from exceptionally high levels to 1 percent of owners, positive and consistent with the increase in concerns about the size of current stocks.

CAPITAL SPENDING

Sixty percent reported capital outlays, down 1 point. Of those making expenditures, 43 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 15 percent spent money for new fixtures and furniture (unchanged). From the start of the recovery in mid-2009 to the end of 2016, an average of 54 percent of small businesses made any capital expenditure, the driving force behind productivity improvements. But since 2016, reports of expenditures have averaged 60 percent. Twenty-six percent plan capital outlays in the next few months, up 1 point. Plans to invest were most frequent in manufacturing, agriculture, and transportation.

INFLATION

The net percent of owners raising average selling prices fell 2 points to a net 15 percent, seasonally adjusted. Finance, insurance and real estate firms most frequently reported raising their average prices, followed by firms in construction. In no industry group did the percent raising prices exceed the percent raising worker compensation, good news for inflation watchers. Seasonally adjusted, a net 27 percent plan price hikes (up 2 points). Overall, inflationary pressures are minimal.

COMPENSATION AND EARNINGS

Reports of higher worker compensation rose 1 point to a net 36 percent of all firms, 1 point below the record high reached last September. Plans to raise compensation fell 4 points to a net 20 percent, suggesting some slowing in compensation gains as job creation plans faded a bit. Twenty-three percent (2 points below November’s record high) selected “finding qualified labor” as their top business problem. The frequency of reports of positive profit trends rose 2 points to a net negative 5 percent reporting quarter on quarter profit improvements, historically a very positive reading. Forty percent of those reporting weaker profits blamed sales, only 8 percent blamed labor costs, and 24 percent cited the usual seasonal change. For those reporting higher profits, 60 percent credited sales volumes.

CREDIT MARKETS

Three percent of owners reported that all their borrowing needs were not satisfied, historically very low. Thirty-three percent reported all credit needs met (up 1 point) and 49 percent said they were not interested in a loan, down 1 point. Four percent reported their last loan was harder to get than the previous one, historically low. Two percent reported that financing was their top business problem (down 1 point) compared to 15 percent citing taxes and 12 percent citing regulations and red tape. The percent of owners reporting paying a higher rate on their most recent loan fell 4 points to 20 percent a month after the highest reading since 2007. Thirty-three percent of all owners reported borrowing on a regular basis. The average rate paid on short maturity loans rose 50 basis points to 6.9 percent.

COMMENTARY

January was an unusual month, a “government shutdown,” uncertainty about federal budgets, and plenty of financial market commentators talking “slowdown” in Europe, China, and in the U.S. For small businesses, hiring and hiring plans signaled a strong economy, job openings were strong, inconsistent with rising weakness in the economy. Inventory spending and capital spending were solid. Of course, that is the “rear view mirror” and owners did express concerns about future sales growth, some weakness in business conditions later in the year and some deterioration in conditions that would be supportive of business expansion. The economy is at “full employment” and it’s hard to grow fast from that position, but solid growth would certainly be welcome.

Part of the management team in Washington has changed and the House of Representatives is now controlled by the Democrats. The new dynamics have created an inability to agree on basic policy measures producing the longest partial government shutdown in history. This has elevated the level of “uncertainty” which is damaging to economic activity. The NFIB Uncertainty Index rose 7 points to 86, the fifth highest reading in the survey’s 45 year history, not a surprising move given the political and financial markets disfunction in January.

There is more talk about “recession risk.” A very credible commentator on the economy pointed out that GDP grew on average 3.9 percent in the year prior to the start of a recession, arguing that strong growth in 2018 (rear view) is no indicator of growth this year. Growth of near 4 percent is very strong, and this history would suggest that growth at those rates created imbalances that “mother nature” (markets) corrected—call it a recession. As of this month, the economy looks strong, including manufacturing and construction, usually areas of concern. Perhaps it is a good sign that current growth is closer to 2.9 percent—creating fewer “imbalances” to fix but very solid for consumers and businesses.