November 2018 Report: Small Business Optimism Index Small Business Optimism Remains Historically High in November
A net nine percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up one point and historically very strong. Thirty percent or more of the owners in construction, manufacturing, retail, and transportation reported quarterly improvements in sales.
Small business optimism posted a modest decline in November with a reading of 104.8, while continuing its exceptionally strong two-year trend, according to the NFIB Small Business Optimism Index. Slightly more than half of the decline was attributable to Expected Business Conditions and Expected Real Sales. Increases in compensation tied a near 30-year high as owners seek to attract more qualified candidates. An increasing percentage of owners reported capital outlays and higher sales.
“Small business owners are enthusiastic about the economy and have demonstrated their optimism by raising wages, creating new jobs, and investing in their businesses throughout 2018,” said NFIB President and CEO Juanita D. Duggan. “Overall, small business owners have shown a historic trend in optimism for their businesses and the economy and continue to be the driving force behind economic growth.”
When viewing the responses received prior to and after the election, the value of the Index was basically unchanged after the election results were known. Capital spending and job creation plans improved. Job openings lost four points but remained very strong. Inventory investment plans declined but remained positive as owners reported additions to current stocks. Expected real sales and expected business conditions six months out fell four and eleven points respectively, and the percent viewing the current period as a good time to expand fell one point.
A net nine percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up one point and historically very strong. Thirty percent or more of the owners in construction, manufacturing, retail, and transportation reported quarterly improvements in sales.
Plans to raise compensation rose two points to a net 25 percent, the highest since 1989, a response to persistently high levels of unfilled open positions. Reports of higher worker compensation were unchanged at a net 34 percent of all firms, remaining very strong.
Sixty-one percent of owners reported capital outlays, up two points from October, with 45 percent of those making expenditures, purchasing new equipment (up two points), 22 percent acquiring vehicles (down four points), and 18 percent improving or expanding facilities (unchanged). Twenty-nine percent plan capital outlays in the next three to six months, down one point, but among the strongest readings in the recovery period. Plans to invest were most frequent in manufacturing (34 percent), transportation (32 percent), and the wholesale trades (38 percent).
“Small business employs about half of the private workforce, so investment and training in that sector is critical to improving overall worker productivity over the next five years,” said NFIB Chief Economist Bill Dunkelberg.
As reported in the November jobs report, small business job creation increased slightly, rising to a net addition of 0.19 workers per firm. Sixteen percent of owners reported increasing employment an average of 2.9 workers per firm, unchanged from October, and 11 percent reported reducing employment and average of 1.9 workers per firm. Matching the August 2018 record high and up two points from last month, 25 percent of owners cited the difficulty of finding qualified workers as their ‘Single Most Important Business Problem.’
LABOR MARKETS
Job creation was solid in November at a net addition of 0.19 workers per firm (including those making no change in employment), up slightly from September and October readings at 0.15. Sixteen percent (unchanged) reported increasing employment an average of 2.9 workers per firm and 11 percent (unchanged) reported reducing employment an average of 1.9 workers per firm (seasonally adjusted). Sixty percent reported hiring or trying to hire (unchanged), but 53 percent (87 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill (unchanged). Twenty-five percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points), matching the record high reached in August. Thirty-four percent of all owners reported job openings they could not fill in the current period, down 4 points from last month’s record high. Fourteen percent reported using temporary workers (unchanged). A seasonally-adjusted net 22 percent plan to create new jobs, unchanged from October’s reading. Job creation plans were strongest in manufacturing (a net 26 percent). However, with labor markets tight, it will be difficult to fulfill those plans. Thirty percent have openings for skilled workers and 12 percent have openings for unskilled labor.
SALES AND INVENTORIES
A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 1 point and historically very strong. Thirty percent or more of the owners in construction, manufacturing, retail, and transportation reported quarterly improvements in sales. The net percent of owners expecting higher real sales volumes fell 4 points to a net 24 percent of owners, a solid reading but a significant decline.
The net percent of owners reporting inventory increases rose 2 points to a net 6 percent (seasonally adjusted), the strongest reading since 2004. The net percent of owners viewing current inventory stocks as “too low” fell 3 points to a net negative 5 percent, suggesting that the stock of inventories is beginning to look a bit excessive given the expected decline in real sales noted above. Still, the net percent of owners planning to add to stocks held at a net 2 percent of owners.
CAPITAL SPENDING
Sixty-one percent reported capital outlays, up 2 points from October. Of those making expenditures, 45 percent reported spending on new equipment (up 2 points), 22 percent acquired vehicles (down 4 points), and 18 percent improved or expanded facilities (unchanged). Eight percent acquired new buildings or land for expansion (up 2 points) and 15 percent spent money for new fixtures and furniture (up 1 point). Twenty-nine percent plan capital outlays in the next three to six months, down 1 point, but among the strongest readings in the recovery period. Continued strong growth is using up capacity and owners need to replace and expand to meet the demand for their products and services.
INFLATION
The net percent of owners raising average selling prices was unchanged at a net 16 percent, seasonally adjusted. Seasonally adjusted, a net 29 percent plan price hikes (up 1 point), the highest since August 2008. A net 38 percent planned price hikes in July 2008 but quickly fell to a net 0 percent 6 months later as the economy plunged into the Great Recession.
COMPENSATION AND EARNINGS
Reports of higher worker compensation was unchanged at a net 34 percent of all firms, very strong. Plans to raise compensation rose 2 points to a net 25 percent, the highest since 1989. Owners complain at record rates about labor quality issues, with 87 percent of those hiring or trying to hire in November reporting few or no qualified applicants for their open positions. Twenty-five percent (up 2 points, a record high) selected “finding qualified labor” as their top business problem, more than cited taxes or regulations as their top challenge. The frequency of reports of positive profit trends fell 1 point to a net negative 4 percent reporting quarter on quarter profit improvements, continuing a streak of historically favorable profit reports.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged. Thirty-two percent reported all credit needs met (up 2 points) and 47 percent said they were not interested in a loan, down 5 points, an indicator that loan demand may pick up. Five percent reported their last loan was harder to get than the previous one, up 1 point but historically low. Two percent reported that financing was their top business problem (unchanged) compared to 19 percent citing taxes, 13 percent citing regulations and red tape, and 25 percent the availability of qualified labor. The percent of owners reporting paying a higher rate on their most recent loan rose 2 points to 19 percent, the highest since 2007 prior to the Federal Reserve taking control of rates. Thirty-two percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans fell 30 basis points to 6.1 percent.
COMMENTARY
The general consensus among forecasters is that the fourth quarter will be solid but slower. Growth appears to have peaked early this year and will slow as we move into 2019. There are a number of reasons, primarily structural, for a slowdown including a lack of qualified workers to fill open positions and a low rate of labor force growth. The Congressional Budget Office calculates our potential GDP and its prospective growth path annually. In simple terms, potential growth (with no inflation) is determined by labor force growth and productivity growth. The dramatic decline in investment and labor force growth in 2008 and in the following years significantly altered the potential growth of the economy and its potential growth path. Each year that actual GDP was below its future potential GDP growth shrunk, as capital spending did not add enough to capacity and the labor force participation rate fell. Thus, although our GDP growth finally caught up with potential growth in early 2018, it was at a much lower level of potential growth (see chart, thanks Prof., Lew Spellman, Univ. of Texas).
So, we are at “full employment” now, but at a lower growth level of GDP than was possible in 2007 or subsequent years because capacity shrunk due to low investment and labor force growth. Based on current estimates for labor force growth and productivity improvement (technology and investment), our future growth will be constrained to be lower than in the pre-2008 period.
Spending (supported by increased government outlays, tax cuts, reduced regulatory costs, a lower saving rate, and solid employment gains) has eliminated excess capacity and now growth depends on increasing labor force participation and productivity gains through training and investment in new capital. Reports of unfilled job openings and few qualified job applicants are at record levels. Owners report raising compensation at record rates to attract new workers. While all of this helps, it will not be sufficient to restore potential growth quickly to higher paths that were eliminated by slow growth in 2008-2016. Small business employs about half of the private workforce, so investment and training in that sector is critical to improving overall worker productivity over the next five years. In the meantime, continued spending demand will put pressure on capacity and prices, keeping the Federal Reserve ready to raise interest rates to try to keep demand from outstripping our capacity to produce which would produce more inflation.
