NFIB December 2016 report: Small business optimism skyrocketed
"Expect better business conditions" rises dramatically
Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point jump in the number of owners who expect better business conditions, according to the monthly National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.
“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”
The Index reached 105.8, an increase of 7.4 points. Leading the charge was “Expect Better Business Conditions,” which shot up from a net 12 percent in November to a net 50 percent last month.
“Business owners who expect better business conditions accounted for 48 percent of the overall increase,” said NFIB Chief Economist Bill Dunkelberg. “The December results confirm the sharp increase that we reported immediately after the election.”
The other two big movers in the survey, “Sales Expectations” and “Good Time to Expand,” jumped by 20 percentage points and 12 percentage points, respectively.
“This is the second consecutive month in which small business owners reported a much brighter outlook for the economy and higher expectations for their businesses,” said Dunkelberg. “In this month’s report, we are also finding evidence that higher optimism is leading to increased business activity, such as capital investment.”
Sixty-three percent of respondents made capital outlays, an eight-point increase over November. Also, the net percent of owners reporting inventory gains increased six points.
“Business owners are feeling better about taking risks and making investments,” said Duggan. “Optimism is the main ingredient for economic expansion. We’ll be watching this trend carefully over the next few months.”
Despite sharply higher optimism, hiring activity remained flat in December. Job creation increased by 0.01 workers per firm and job openings dropped two points. According to the NFIB Jobs report, released last week, finding qualified workers remains a persistent problem for small business owners.
“The labor market is getting tighter,” said Dunkelberg. “That’s good news for workers because they can command higher compensation, but many small business owners aren’t yet confident enough to raise prices to offset the higher labor costs. Owners are still in a pinch, but the overall picture for December was very positive.”
LABOR MARKETS
In spite of rising post-election optimism, reported job creation remained weak in December with the seasonally adjusted average employment change per firm posting a gain of 0.01 workers per firm, positive, but barely. Thirteen percent (up 1 point) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 4 points) reported reducing employment an average of 4.6 workers per firm (seasonally adjusted).
Fifty-one percent reported hiring or trying to hire (down 7 points), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (down 4 points).
Twenty-nine percent of all owners reported job openings they could not fill in the current period, down 2 points, but from November’s highest reading in this recovery. This indicates that labor markets remain tight. Eleven percent reported using temporary workers, down 5 points, a surprising drop.
A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and the strongest reading in the recovery.
Historically, the NFIB job openings data have been a strong predictor of the unemployment rate. The unemployment rate is expected to remain steady or perhaps rise if higher consumer sentiment encourages more labor force participation. High levels of job openings also suggest that job growth might be muted by hiring difficulties.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 1 percentage point to a net negative 7 percent. The surge in consumer optimism did not produce a noticeable improvement in sales at small businesses, perhaps because of the growth of internet sales which might detract from retail holiday business.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 20 points, after a 10 point rise in November, to a net 31 percent of owners, the highest reading since October 2005 with a reading of 40 percent. The reduction of “policy anxiety” is surely responsible for some of the remarkable improvements in sales expectations and rising consumer sentiment. The expectation of important cost relief from deregulation and tax reform is strong among small business owners and consumers, all of which is yet to be accomplished and has a hard political road to travel. But the data indicate that business owners are indeed very optimistic.
The net percent of owners reporting inventory gains gained 6 points to a net 3 percent (seasonally adjusted), a rather strong report, as long as those inventories are built to meet rising consumer demand and not a result of weakening sales.
The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net negative 3 percent, still more feeling stocks are too high than too low. The surge in expected sales gains should absorb some of these “excess stocks”. The net percent of owners planning to add to inventory improved was unchanged a net 4 percent, a good number reflecting expected stronger demand.
CAPITAL SPENDING
Sixty-three percent reported capital outlays, up 8 points from November and the highest reading since January 2013. Reports of expenditures tend to rise late in the year reflecting tax driven outlays (expensing), but this is a solid number even if weak compared to other expansions and is the second highest reading in the recovery. Of those making expenditures, 46 percent reported spending on new equipment (up 10 points), 23 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (unchanged). Overall, a nice pickup in spending.
The percent of owners planning capital outlays in the next 3 to 6 months jumped 5 points to 29 percent, the highest reading since December 2007, the peak of the last expansion but well below the high readings in the mid-90s of 40 percent. Seasonally adjusted, the net percent expecting better business conditions rose 38 percentage points to a net 50 percent, adding to the19 point gain in November. The seasonally adjusted net percent expecting higher real sales rose 20 points to 31 percent of all owners, after a 10 point gain in November. This optimism appears to be transitioning into strong spending plans as well as increases in actual outlays, a component of growth that was missing in the recovery.
INFLATION
The net percent of owners raising average selling prices was a net 6 percent (up 1 point). The net percent raising prices has been virtually 0 all year, but November and December presented opportunities for owners to raise prices a bit. Eleven percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 13 percent reported price increases (down 1 point).
Seasonally adjusted, a net 24 percent plan price hikes up 5 points after a 4 point gain in November. Inflation requires an environment in which demand (spending) pushes against the ability of the economy to supply output. This does not describe most of the economy with the possible exception of housing where new construction seems to be lagging demand and, hence, more price increases (7 percent recently), substantial in some markets. House prices are not included directly in the price indices, so inflation there must find its way to the inflation measures through rising rents and the “owner occupied rental equivalent” computation which accounts for 40 percent of the CPI for example.
COMPENSATION AND EARNINGS
Reports of increased compensation rose 5 points to 26 percent, the second best reading in 2016. The market for “qualified” workers is clearly tight, as recovery high levels of owners categorize the lack of qualified workers as their top business problem. However, owners are having little success in passing higher labor costs along to customers as the frequency of reported price hikes remained low in comparison.
Earnings trends improved 6 points to a net negative 14 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor. But rising labor costs, due to shortages or more widely to government regulation, will continue to pressure the bottom line until demand is strong enough to support rising selling prices.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, unchanged over the past few months. Twenty-nine percent reported all credit needs met (down 1 point), and 52 percent explicitly said they did not want a loan. However, including those who did not answer the question, presumably uninterested in borrowing, 67 percent of owners have no interest in borrowing. Record numbers of firms remain on the “credit sidelines”, seeing no good reason to borrow yet, in spite of the surge in optimism. As optimism is translated into spending plans, borrowing activity should pick up. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 19 percent citing regulations and red tape, and 12 percent each the availability of qualified labor and weak sales.
Thirty percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans declined 10 basis points to 5.5 percent. Overall, loan demand remains historically weak, owners not able find many good reasons to borrow and invest, even with abundantly cheap money. If the positive expectations for real sales and business conditions observed after the election prevail in the coming months, this trend may start to reverse.
The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending appreciably. The “Trumpian surge” has yet to translate into spending plans to a significant degree.
COMMENTARY
In a wealthy economy with substantial discretion over the allocation of resources, expectations and sentiment can trigger substantial changes in “macroeconomic activity”. Some of our 300 million consumers can decide to spend a bit more if the future looks brighter. A larger number of our six million employer firms could decide to hire another worker to meet higher expected demand or expand their businesses to handle expected increases in sales. Just how much growth this can generate depends on the availability of unused capacity, in labor and production facilities and debt or capital funds. No doubt we can do better than 2 percent and, for short periods, 3 to 4 percent growth. Ultimately, job creation depends on economic growth, modified by the level of productivity.
What is required is a sensible set of policies that do not squander our scarce resources. Virtually every business owner can identify regulations that have little or no apparent value but have high compliance costs, using up scarce capital and valuable management time. Politicians say they want to create jobs but their regulations and laws passed only increase the cost of hiring a worker, and that is not good for job creation. Economic policies designed to redistribute the pie do not grow the pie, indeed they shrink it by building dependency among some of the population and businesses who need the discipline of competition and the marketplace. Optimistic consumers and business owners are more likely to bet (spend and hire) on a future that seems to hold promise, but to maintain the enthusiasm, reality will play an important supporting role. The appearance of a new customer is much more powerful than the expectation of one. And actual results in Washington D.C. will be much more supportive than “hope and no good change” as we have discovered.
