January 2021 Report: Small Business Optimism Drops Further Below Historical Index Average in January
"The COVID-19 pandemic continues to dictate how small businesses operate and owners are worried about future business conditions and sales.”
The NFIB Small Business Optimism Index declined in January to 95.0, down 0.9 from December and three points below the 47-year average of 98. Owners expecting better business conditions over the next six months declined seven points to a net negative 23%, the lowest level since November 2013. The net percent of owners expecting better business conditions has fallen 55 points over the past four months.
“As Congress debates another stimulus package, small employers welcome any additional relief that will provide a powerful fiscal boost as their expectations for the future are uncertain,” said NFIB Chief Economist Bill Dunkelberg. “The COVID-19 pandemic continues to dictate how small businesses operate and owners are worried about future business conditions and sales.”
Key findings include:
- The NFIB Uncertainty Index decreased 8 points to 82.
- The percent of owners thinking it’s a good time to expand decreased 4 points to 8%.
- Sales expectations over the next three months declined 14 points to a net negative 4%.
- Earnings trends over the past three months declined 7 points to a net negative 14% reporting higher earnings.
NFIB’s monthly jobs report showed job growth continued in January. Firms increased employment by 0.36 workers per firm on average over the past few months, up from 0.30 in December, a strong 2-month performance. However, the hiring remains uneven geographically and by industry.
Fifty-one percent of owners reported hiring or trying to hire in January, unchanged from December. Owners have plans to fill open positions, with a seasonally adjusted net 17% planning to create new jobs in the next three months.
Up three points from December, 55% of owners reported capital outlays in the next six months. Of those making expenditures, 41% reported spending on new equipment, 27% acquired vehicles, and 15% improved or expanded facilities. Five percent of owners acquired new buildings or land for expansion and 12% spent money on new fixtures and furniture. Twenty-two percent of owners’ plan capital outlays in the next few months, unchanged from December but still low.
A net negative 7% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 5 points from December. The net percent of owners expecting higher real sales volumes decreased 2 points to a net negative 6%, overall, not a positive picture.
The net percent of owners reporting inventory increases rose 2 points to a net negative 4%. Owners viewing current inventory stocks as “too low” decreased 2 points in January to a net 5%, matching the decline in the percent of firms reporting higher inventories. A net 4% of owners plan inventory investment in the coming months. Overall, a positive inventory picture.
Owners raising average selling prices increased 1 point to a net 17% (seasonally adjusted). Eleven percent reported lower average selling prices and 27% reported higher average prices.
Price hikes were the most frequent in wholesale (40% higher, 6% lower) and retail (27% higher, 10% lower). Seasonally adjusted, a net 28% plan price hikes, up six points from December.
A net 25% of owners (seasonally adjusted) reported raising compensation (up four points) and a net 17% plan to do so in the coming months (up three points). Only seven percent of owners cited labor costs as their top business problem and 21% said that labor quality was their top business problem.
The frequency of reports of positive profit trends decreased 2 points to a net negative 16% reporting quarter on quarter profit improvement. Among owners reporting lower profits, 43% blamed weaker sales, 17% cited the usual seasonal change, 6% cited a higher cost of materials, 6% cited labor costs, and 5% cited lower prices. For owners reporting higher profits, 60% credited sales volumes, 17% cited usual seasonal change, and 8% cited higher prices.
Only 2% of owners reported that all their borrowing needs were not satisfied, down one point from December. Twenty-two percent reported all credit needs met and 61% said they were not interested in a loan. A net 1% of owners reported their last loan was harder to get than in previous attempts.
One percent reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was negative 4%, up one point from December, a friendly lending market.
LABOR MARKETS
Job growth continued in January. Firms increased employment by 0.36 workers per firm on average over the past few months, up from 0.30 in December, a very strong 2-month performance. But the hiring is uneven geographically and by industry. Thirty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from December. Twenty-eight percent have openings for skilled workers (up 1 point) and 12 percent have openings for unskilled labor (up 1 point). Forty-four percent of the job openings in construction are for skilled workers, up 3 points. Fifty-six percent of construction firms reported few or no qualified applicants (down 3 points) and 32 percent cited the shortage of qualified labor as their top business problem (down 1 point but historically high). Overall, 51 percent reported hiring or trying to hire in January, unchanged from December. Owners have plans to fill open positions, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, unchanged from December. Forty six percent (90 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in January, down 2 points. Twenty-six percent of owners reported few qualified applicants for their open positions (unchanged) and 20 percent reported none (down 2 points).
CAPITAL SPENDING
Fifty-five percent reported capital outlays in the last six months, up 3 points from December. Of those making expenditures, 41 percent reported spending on new equipment (up 3 points), 27 percent acquired vehicles (up 7 points), and 15 percent improved or expanded facilities (up 4 points). Five percent acquired new buildings or land for expansion (unchanged), and 12 percent spent money for new fixtures and furniture (up 4 points). The increase is welcome, but leaves capital spending historically low, damaging growth prospects and future productivity gains. Twenty-two percent plan capital outlays in the next few months, unchanged from December, but low. This is consistent with the dismal view of future economic activity and sales levels held by small business owners. New capital is not needed if more production and sales don’t occur.
COMPENSATION AND EARNINGS
Seasonally adjusted, a net 25 percent reported raising compensation (up 4 points) and a net 17 percent plan to do so in the coming months, up 3 points. Seven percent cited labor costs as their top business problem (up 1) and 21 percent said that labor quality was their top business problem, unchanged from December. In some sectors such as construction, finding qualified labor is an issue and when found, is expensive. However, in the service sector, wage pressures are not a problem. The frequency of reports of positive profit trends decreased 2 points to a net negative 16 percent reporting quarter on quarter profit improvement. The profit decline occurred “in sympathy” with the fall-off in sales late in 2020. Among owners reporting lower profits, 43 percent blamed weaker sales, 17 percent cited the usual seasonal change, 6 percent cited a higher cost of materials, 6 percent cited labor costs, and 5 percent cited lower prices. For owners reporting higher profits, 60 percent credited sales volumes, 17 percent cited usual seasonal change, and 8 percent cited higher prices.
CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-four percent reported all credit needs met (down 2 points) and 61 percent said they were not interested in a loan (up 1 point). A net 1 percent reported their last loan was harder to get than in previous attempts (down 2 points). One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 4 percent, up 1 point from December. The average rate paid on short maturity loans was 4.9 percent, up 0.1 percentage points from November. Loan rates continue to be consistently low. Twenty-three percent of all owners reported borrowing on a regular basis (down 3 points).
SALES AND INVENTORIES
A net negative 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 5 points from December. The net percent of owners expecting higher real sales volumes decreased 2 points to a net negative 6 percent. The net percent of owners reporting inventory increases rose 2 points to a net negative 4 percent. This is not surprising given the increase in the percent of owners reporting lower sales compared to December. Consumer spending did fade at the end of 2020. The net percent of owners viewing current inventory stocks as “too low” decreased 2 points in January to 5 percent, matching the decline in the percent of firms reporting higher inventories. A net 4 percent of owners plan inventory investment in the coming months, unchanged from December.
INFLATION
The net percent of owners raising average selling prices increased 1 point to a net 17 percent, seasonally adjusted. Unadjusted, 11 percent (up 1 point) reported lower average selling prices and 27 percent (up 5 points) reported higher average prices. Price hikes were most frequent in wholesale (40 percent higher, 6 percent lower) and retail (27 percent higher, 10 percent lower). Seasonally adjusted, a net 28 percent plan price hikes (up 6 points).
COMMENTARY
January came in with a whimper as consumer spending tailed off sharply at the end of 2020, leaving spending 2.5% below levels at the start of the year. GDP did no better, ending up 3.5% below 2019 peak. Still, that represents a remarkable recovery from the plunge in GDP in 2020 Q2. Twenty million workers became unemployed, 10 million were “recovered,” and the other 10 million remain unemployed coming into 2021. Initial claims for unemployment benefits are falling, indicating workers are finding a job (or giving up). NFIB firms reported solid hiring.
The government is organizing another stimulus package, about $2 trillion. It includes $1,400 payments to some citizens, additional unemployment benefits, vaccination program funds, well as a chunk of aid for states and localities. Added to the most recently passed stimulus package, this would provide a powerful fiscal boost that many fear would be strong enough to actually produce a jump in inflation.
Small firms are trying to figure out how to operate in the “now,” adjusting operations to stay open, and seize upon any opportunities to grow. Hiring is good for those in less restricted industries and where consumer spending is strong. However, the “future” is not so rosy for many small firms, with expectations for business conditions and real sales in the tank. Important activities like capital spending remain depressed. Measures of applications for new business permits are strong, but just how are along these starts are in opening a real business is less clear.
With the new administration rolling out its policies, many important factors (taxes, government payments, etc.) are still unclear. The administration is moving quickly, so owners will have a much clearer picture of the future business environment soon. Until then, the economy has enough momentum to keep moving forward with construction and manufacturing leading the way. This will provide needed support (sales growth) for the new firms as well as for survivors.
