NFIB Report March 2017: Small business optimism still up
The Index of Small Business Optimism fell 0.6 points to 104.7, sustaining the remarkable surge in optimism that started November 9, 2016, the day after the election. Three of the 10 Index components posted a gain, five declined, all by just a few points, and two were unchanged. It is encouraging that the Index has held at historically high levels for five months. Optimism has not faded much and there is growing evidence that this optimism is being translated into more spending and hiring, although not at explosive rates. Consumer confidence is hitting new high levels and small business owners have not given up hope that their optimism will be rewarded with performance.
LABOR MARKETS
Small business owners reported a seasonally adjusted average employment change per firm of 0.16 workers per firm, a solid showing. Twelve (down 2 points) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 4.3 workers per firm (seasonally adjusted). Fifty-one percent reported hiring or trying to hire (down 1 point), but 45 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 1 point), far more than were concerned with weak sales. Thirty percent of all owners reported job openings they could not fill in the current period, down 2 points but historically high. Thirteen percent reported using temporary workers, up 1 point. A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and a very strong reading. Not seasonally adjusted, 27 percent plan to increase employment at their firm (up 3 points), and 3 percent plan reductions (unchanged).
SALES AND INVENTORIES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 3 percentage point to 5 percent after a 4 point gain last month. Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 8 points to a net 18 percent of owners. The net percent of owners reporting inventory increases fell 1 point to a net 0 percent (seasonally adjusted), extending the accumulation reported in January.
The net percent of owners viewing current inventory stocks as “too low” deteriorated 3 points to a net negative 5 percent, a surprise in light of the persistence of reported sales gains this year. The surge in expected sales gains earlier in the year should make some of these “excess stocks” look better, useful for meeting expected demand growth. Nonetheless, the net percent of owners planning to add to inventory stayed positive, losing just 1 point to a net 2 percent.
CAPITAL SPENDING
Sixty-four percent reported capital outlays, up 2 points over February and 5 points over January. Of those making expenditures, 46 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (down 2 points). Five percent acquired new buildings or land for expansion (down 2 points) and 16 percent spent money for new fixtures and furniture (unchanged). Overall, capital expenditures are trending up, fueled by expectations of better tax and regulatory treatment but also by “green shoots” on the ground with improved sales and consumer spending. The percent of owners planning capital outlays in the next 3 to 6 months rose 3 points to 29 percent, the highest reading in the recovery.
INFLATION
The net percent of owners raising average selling prices was a net 5 percent (down 1 point). Twelve percent of owners reported reducing their average selling prices in the past three months (up 2 points), and 19 percent reported price increases (up 3 points). The frequency of reported price hikes has ticked up since November, but not enough to produce much inflation. Seasonally adjusted, a net 20 percent plan price hikes.
COMPENSATION AND EARNINGS
Reports of increased compensation rose 2 points to 28 percent, one of the best readings since February 2007 but below the recovery record level reached in January. Owners complain at recovery record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A near-recovery record 16 percent ranked “finding qualified labor” as their top business problem, almost as many as cite the cost of regulatory compliance as their top challenge. Rising compensation will attract workers back into the labor force but it is a slow process. Earnings trends improved 4 points to a net negative 9 percent reporting quarter on quarter profit improvements.
CREDIT MARKETS
Only 4 percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically low. Thirty-two percent reported all credit needs met (up 2 points), and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 20 percent citing taxes, 17 percent citing regulations and red tape, and 16 percent the availability of qualified labor. Weak sales garnered 12 percent of the vote. Thirty percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was unchanged at 5.4 percent. Overall, loan demand remains historically weak, even with cheap money. The net percent of owners expecting credit conditions to ease in the coming months was unchanged at a negative 3 percent.
COMMENTARY
The surge in small business owner optimism was maintained in March, the fifth month of historically “off-the-charts” readings. Unfortunately, the expectation for economic growth is not off the charts. Official forecasts from the New York and Atlanta Federal Reserve Banks put first quarter growth at 0.9 percent or 2.9 percent as of March 31, hugely disparate estimates. Domestic spending, which excludes exports but includes imports will be a more important measure for small business owners. That should look better with consumer confidence surging, supported by solid job growth.
On the job side, the NFIB indicators are consistent with another low 200k job month. Hiring plans are strong and reports of past hiring solid. However, the inability of owners to find applicants that can satisfactorily fill open positions will become more of a headwind to job growth. Rising wages will attract some new participants into the workforce, but owners will also have to undertake more training to fill specialized positions. For example, the skill mismatch is restricting growth in housing construction which, in turn, is producing rising home prices. A “manufacturing renaissance” will also require solutions to the skill shortage.
The Federal Reserve is indicating that it will raise rates several more times this year. Given the poor economic performance of 2016 prior to the last rate hike, one might wonder what, exactly, does “data dependent” mean. That said, expect the Federal Reserve to persist with a few more hikes, which will have little impact on lending activity and may enhance availability: loan committees are still troubled making longer term loans at rates we used to pay to depositors. Higher rates make it more comfortable. In the meantime, we wait for the “fiscal policy shoe” to drop. But actual spending won’t show up until 2018, if all goes well. Retroactive tax rate changes might help later this year.
In the meantime, the only engine for growth is going to be the private sector and its confidence in Washington, D.C’s new management team. Hopefully, it won’t be shaken too badly by political antics.
