NFIB Report July 2017: Small business optimism regains momentum in July

Bill Dunkelberg

Job openings and plans to create new jobs lead monthly NFIB Index of Small Business Optimism

The Index of Small Business Optimism rose 1.6 points to 105.2, preserving the surge in optimism that started the day after the election. Seven of the 10 Index components posted a gain, two declined, and one was unchanged. Since the recession, the Index peaked at 105.9 in January, just 0.7 points above the July reading. Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, D.C. The economy (GDP) grew about 2% in the first half of the year, nothing special, but the second quarter was much stronger than the first, and consumer spending was a major contributor to growth. The stock market continues to post record high readings, although a bit inconsistent with moderate growth in output from the nation’s business sector.


Small business owners reported an adjusted average employment change per firm of 0.21 workers per firm over the past few months, a solid performance. Thirteen percent (up 3 points) reported increasing employment an average of 4.5 workers per firm and 11% (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). A seasonally adjusted net 19% plan to create new jobs, up 4 points, with higher levels not seen since December 1999.

Sixty percent reported hiring or trying to hire (up 6 points), but 52% (87% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 4 points), second only to taxes. This is a particularly severe problem in construction (28%) and manufacturing (21%) where labor shortages are the top problem, trumping taxes and regulatory costs. Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points, the highest reading since November 2001.


The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a net 0%, a 4-point improvement over June. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 5 points, increasing to a net 22% of owners.

The net percent of owners reporting net inventory increases gained 4 points to a net 1% (seasonally adjusted), reversing months of inventory stock reductions that were generated by solid consumer spending in the second quarter. The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net -2%, as sales expectations changed for the better, requiring higher inventory stocks. The net percent of owners planning to add to inventory rose 1 point to a net 5%, the highest reading this year to date and historically normal for a growing economy.


Fifty-seven percent reported capital outlays, unchanged. Of those making expenditures, 38% reported spending on new equipment (down 2 points), 24% acquired vehicles (up 3 points), and 17% improved or expanded facilities (up 4 points). Five percent acquired new buildings or land for expansion (up 1 point) and 13% spent money for new fixtures and furniture (up 2 points). There is still little evidence that capital spending, which raises worker productivity, is going to increase its contribution to growth anytime soon.


The net percent of owners raising average selling prices posted a 7-point increase, rising to a net 8% of all firms, and erasing the dramatic decline posted in June. This is the highest reading since 2014, good news for the Federal Reserve which is trying to generate more inflation. Nine percent of owners reported reducing their average selling prices in the past three months (down 2 points) and 18% reported price increases (up 4 points). Seasonally adjusted, a net 23% plan price hikes (up 4 points). If expectations for sales volumes are realized, some of the price hikes may stick.


While inflation remains low, reports of higher worker compensation continue to be strong, consisted with historically tight labor markets. Reports of increased compensation rose 3 points to a net 27%. Rising compensation will attract workers back into the labor force, but it is a slow process. The frequency of reports of improved profit trends was unchanged at a net -10% reporting quarter on quarter profit improvements, historically an excellent reading and one of the best readings in this expansion. In spite of rising labor costs, owners are seeing decent bottom line performance.


Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-one percent reported all credit needs met (up 4 points) and 51% explicitly said they were not interested in a loan, down 3 points. Including those who did not answer the question, 66% of owners have no interest in borrowing. Only 2% reported that financing was their top business problem compared to 21% citing taxes, 16% citing regulations and red tape, and 19% the availability of qualified labor. Thirty percent of all owners reported borrowing on a regular basis. The average rate paid on short maturity loans was up 30 basis points at 5.9%.


It appears that the Federal Reserve will stay on course, with a likely announcement about shrinking their portfolio in September and another 25 basis point increase in rates in December. Neither of these moves will have a major impact on owners, interest rates are still low, and lenders are more comfortable making loans now that we have left the “0 floor” behind.

Second quarter GDP growth came in at 2.6%. However, this is the first estimate from the Bureau of Economic Analysis, two revisions are yet to come. First quarter GDP was revised down to 1.2%. Consumers spent more, but residential investment weakened, and capital spending did not add to the growth. Inflation measures were lower in Q2, not good news for the Federal Reserve but they should be pleased that inflation has remained so low.

Although no progress has been made on health care or tax reform, many important changes have occurred to the regulatory structure with few if any new rules showing up in the Congressional Register. These changes will seep into the regulatory structure with little fanfare, but will have significant impacts on regulation costs paid by small businesses going forward.

Apparently economic activity in the second quarter was good enough to divert owner attention from the impotence of Washington lawmakers. There’s nothing like more customers to make owners happy, and optimism held up as did important measures of spending and hiring plans. Congress still holds the key to faster growth, so let’s hope they open the door.

Bill Dunkelberg is chief economist of the National Federation of Independent Business (NFIB).

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