NFIB report for June 2018: Small Business Optimism Index Small Business Optimism Remains Historically High as Sales and Profits Maintain Strength

July 15, 2018

Ten percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, down five points but still one of the strongest readings in years.

The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May. Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983.

“Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits,” said NFIB President and CEO Juanita Duggan. “The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”

Highlights from the June report include:

Owners reported some of the strongest nominal sales in years.
Plans to invest in additional inventories advanced solidly.
Plans to create new jobs posted a solid gain and the percent of owners with open positions tied the record high.
Reports of compensation increases remained historically high and finding qualified workers easily held on to the top spot in the “single most important business problem” list.

A net ten percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, down five points but still one of the strongest readings in years. June is the seventh consecutive strong month of reported sales gains. Reports of sales increases were most frequent in manufacturing and the wholesale trades.

“There was a fractional decline in the Index from May to June, statistically insignificant. Small business owners are already seeing their bottom lines grow due to strong sales and regulatory relief and the new tax law is expected to push profits higher as the year progresses,” said NFIB Chief Economist Bill Dunkelberg.

The frequency of reports of positive profit trends hit a record high in May, moving down only four percentage points in June, maintaining one of the best readings in the survey’s 45 year history. Additionally, reports of positive sales trends have been historically strong for the past few months, so owners have had to satisfy the strong sales demand by selling out of inventories. This produced an increase in the percent of owners planning to invest in new inventory stocks in the coming months.

The net percent of owners viewing current inventory stocks as “too low” gained four points to a net zero percent, a very positive move. This confirms that the inventory reductions reported were indeed a result of strong sales, not a result of a less certain future.

As reported in NFIB’s June jobs report, 63 percent of owners reported hiring or trying to hire, up five points from last month and the highest level since September 1999. However, 55 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.

LABOR MARKETS

Reports of employment gains remain strong among small businesses. Owners reported adding a net 0.19 workers per firm on average, virtually unchanged from May and a good number. Fifteen percent (down 1 point) reported increasing employment an average of 3.6 workers per firm and 12 percent (up 4 points) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). Sixty-three percent reported hiring or trying to hire (up 5 points), but 55 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-one percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 2 points), a few points below the survey record. Thirty-six percent of all owners reported job openings they could not fill in the current period, up 3 points matching the survey record high set in November 2000. Twelve percent reported using temporary workers, unchanged. A seasonally-adjusted net 20 percent plan to create new jobs, up 2 points from May and very strong. Labor markets are very tight, for both skilled and unskilled workers. Thirty-one percent have openings for skilled workers, and 13 percent have openings for unskilled labor, both ahead of the May readings. More firms are looking for workers than workers looking for a job. And the hiring strength is in industries that pay well: construction, manufacturing, and financial services.

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, down 5 points but still one of the strongest readings in years. Reports of sales increases were most frequent in manufacturing and the wholesale trades. The net percent of owners expecting higher real sales volumes fell 5 points to a net 26 percent of owners, reversing half of the 10 point rise in May. Retailers and firms in financial services were especially optimistic about future sales prospects, the basis for their strong hiring and inventory investment plans.

The net percent of owners reporting inventory increases fell 6 points to a net negative 2 percent (seasonally adjusted), ending a five month positive run for reports of increases. The net percent of owners viewing current inventory stocks as “too low” (a positive number means more think stocks are too low than too high, a positive for inventory building) gained 4 points to a net 0 percent, a very positive move. This confirms that the stock reductions reported were indeed a result of strong sales, not a result of less certainty. The net percent of owners planning to build inventories rose 2 points to a net 6 percent.

CAPITAL SPENDING

Fifty-nine percent reported capital outlays, down 3 points from May, but solid. Of those making expenditures, 44 percent reported spending on new equipment (down 3 points), 26 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 1 point) and 12 percent spent money for new fixtures and furniture (down 1 point). Solid investment spending is necessary to produce the improvements in productivity that will secure future increases in real wages. Twenty-nine percent plan capital outlays in the next few months, down 1 point from May. Plans were most frequent in manufacturing (38 percent) where additional capacity and productivity-enhancing investments are needed.

INFLATION

The net percent of owners raising average selling prices fell 5 points to a net 14 percent seasonally adjusted. Unadjusted, 9 percent of owners reported reducing their average selling prices in the past three months (up 3 points), and 25 percent reported price increases (down 3 points). Inflation does not appear to be a threat in the current environment. Seasonally adjusted, a net 24 percent plan price hikes (down 2 points).

COMPENSATION AND EARNINGS

Reports of higher worker compensation slipped 4 points from May’s record reading to a net 31 percent of all firms. Plans to raise compensation rose 1 point to a net 21 percent, high but below its recent peak of 24 percent in January. Owners complain at record rates about labor quality issues, with 87 percent of those hiring or trying to hire in June reporting few or no qualified applicants for their open positions. The frequency of reports of positive profit trends fell from its record high in May, losing 4 percentage points to a net negative 1 percent reporting quarter on quarter profit improvements, still one of the best readings in the survey’s 45 year history.

CREDIT MARKETS

Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty percent reported all credit needs met (down 7 points) and 54 percent said they were not interested in a loan, up 11 points. These are extreme movements, and the July figures are likely to be an average of May and June. Only 2 percent reported that financing was their top business problem compared to 21 percent the availability of qualified labor, 16 percent citing taxes, and 14 percent citing regulations and red tape. Two percent reported loans “harder to get,” historically about as low as the measure can go. Twenty-eight percent of all owners reported borrowing on a regular basis (down 6 points). The average rate paid on short maturity loans fell 30 basis points to 6.1 percent.

COMMENTARY

GDP growth in the first quarter was disappointing, as have been first quarter reports for several years now. Lacking a better explanation, the chatter is that there is a seasonal adjustment problem. The second quarter looks like it will come in at a much better pace (the New York Federal Reserve anticipates 2.8 percent, the Atlanta Federal Reserve 3.8 percent). Certainly economic activity on Main Street is supportive of a much better GDP growth reading. Small business owners are pushing ahead with an expansive agenda, trying to figure out how to produce more with a restricted supply of labor. Unemployment is about as low as it can go. Mortgage rates and inflation are both still historically low, and incomes are rising.

Main Street is getting the good news first hand – higher sales, more profits, and opportunities to expand and grow. They see at street level the successes being achieved in the economy that news programs don’t cover nearly enough. Record numbers see the current period as a good time to expand operations and are trying to hire more workers. Capital spending is at levels not seen in a decade. Regulatory burdens are being reduced. Small business owners are focusing on what really matters and moving the economy forward. Economic growth will be solid through the end of the year on Main Street.