September 2014 NFIB Report: Small business optimism bumps up again

Bill Dunkelberg



August’s Optimism Index rose 0.4 points to 96.1 making it the second highest reading since October 2007. Expectations are still glum, although improving grudgingly. More owners still think business conditions will be worse in six months than think they will be better. Few see the current period as a good time to expand. The outlook for improvements in real sales volumes faded. Interest in borrowing continues to remain at record low levels; owners are satisfied with inventories and aren’t planning a lot of investment. There is still no evidence that we are about to ramp up spending and hiring to “3 percent” GDP growth levels. 


NFIB owners increased employment by an average of 0.02 workers per firm in August (seasonally adjusted), the eleventh positive month in a row but basically a “zero” net gain. Fifty-six percent of the owners hired or tried to hire in the last three months and 46 percent reported few or no qualified applicants for open positions. Twenty-six percent of all owners reported job openings they could not fill in the current period, up 2 points, suggesting no change or a modest reduction in the unemployment rate. Sixteen percent reported using temporary workers, up 1 point and up 2 points over the past two months. Job creation plans faded however, suggesting weaker job creation ahead. The net percent of owners planning to increase employment fell 3 points to a seasonally adjusted net 10 percent. Historically, these are not statistics associated with periods of strong employment growth. 


The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 1 point to a net negative 2 percent. Thirteen percent cited weak sales as their top business problem, one of the lowest readings since December 2007, the peak of the expansion. Expected real sales volumes posted a 4 point decline, falling to a net 6 percent of owners expecting gains.

The pace of inventory reduction improved 1 point, with a net negative 2 percent of all owners reporting growth in inventories (seasonally adjusted). So, on balance, more firms are reducing inventory than building stocks. The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net negative 2 percent. Sales trends continued to deteriorate a bit but remained near the best levels in the recovery, just historically weak. The net percent of owners planning to add to inventory stocks rose 1 point to a net 1 percent. While inventories have been building solidly at the national level, it appears that the small business sector is adding little to the accumulation of stocks. 


Fifty-eight percent reported outlays, up 3 points from July, and the second best reading since January 2008. The percent of owners planning capital outlays in the next 3 to 6 months rose 4 points to 27 percent, the best reading since the peak of the last expansion. Nine percent characterized the current period as a good time to expand facilities, down 1 point and low for periods of solid growth. A net 6 percent of all owners expect improved real sales volumes, down 4 points. Overall, owner expectations do not signal a very positive outlook. Perhaps the gain in spending plans more reflects the increasing pressure from “depreciation” rather than a positive outlooks for sales. 


Seasonally adjusted, the net percent of owners raising selling prices was a net 6 percent, down a surprising 8 percentage points. Twenty percent plan on raising average prices in the next few months (down 3 points). Only 3 percent plan reductions (unchanged), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 19 percent plan price hikes (down 3 points). These developments are good news to the Federal Reserve, making them more comfortable providing “accommodation” even though there isn’t much evidence to support the notion that buying bonds is helping the employment picture. 


Earnings trends improved 1 point, rising to a net negative 17 percent, one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, along with poor sales performances. Two percent reported reduced worker compensation and 25 percent reported raising compensation, yielding a seasonally adjusted net 22 percent reporting higher compensation, up 1 point and the second best reading since the first quarter of 2008. A net seasonally adjusted 15 percent plan to raise compensation in the coming months (up 1 point). The reported gains in compensation are now solidly in the range typical of an economy with solid growth, but it isn’t clear that we have “solid growth”, unless we are ready to settle for the sub-par tunnel we have been in. 


Four percent of the owners reported that all their credit needs were not met, equal to the record low. Twenty-eight percent reported all credit needs met, and a record high 55 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 24 percent citing taxes, 19 percent citing regulations and red tape and 13 percent citing weak sales. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent; more owners expect that it will be “harder” to arrange financing than easier. This is the most favorable reading about credit market conditions since 2006, occurring at a time when the Federal Reserve is terminating its aggressive QE3 policy. Interest rates are low, but prospects for putting borrowed money profitably to work are not great and so loan demand remains weak among small business owners. 


The good news, no recession signal. The bad news, no expansion signal. The NFIB Optimism Index was steady at the high end of its fairly narrow tunnel of moderately poor performances. A persistent up-trend in reported increases in average selling prices snapped, probably in response to unexpectedly weak consumer spending. Capital spending showed a bit more life, along with a hike in plans to continue it. But employment indicators were flat. Job openings increased, anticipating a lower unemployment rate but not more jobs as job creation plans faltered. There just wasn’t a lot of good GDP news in the numbers, just a “more of the same” picture. Spending and hiring seem to be driven mostly by population growth and the need to replace depreciated assets. Weak consumer spending is not helping. Strong exports do not help most small businesses. Manufacturers and some transportation companies benefit but not most others.

The litany of issues that need to be addressed have been laid out by observers for years now, but there is little progress in Washington on any of them. And new ones are being added along the way. Consumer sentiment (Reuters/University of Michigan) is as low in August as it was a year ago and the readings this year are no better than the weak December, 2013 reading. Only 11 percent of consumers think government is doing a “good” job, 48 percent say “poor”. Incomes are rising only for the top 10 percent and they don’t spend enough of that income to compensate for the weak spending of the 90 percent.

Manufacturing is doing well, but there are not many jobs there. However, the small business and consumer segments are not strong and that means economic growth cannot fundamentally be strong. Government spending will not be a major source of stimulus. So, the plodding on continues.


This survey was conducted in August 2014. A sample of 3,938 small-business owners/members was drawn. Five hundred ninety-eight (598) usable responses were received – a response rate of 15 percent. 


Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2014, the NFIB retains ownership. All Rights Reserved.

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