posted on 10 January 2017
from the National Federation of Independent Business
Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point jump in the number of owners who expect better business conditions.
The December survey confirmed the euphoria observed in the post-election survey (November surveys postmarked after election day). The Optimism Index registered 95.4 in the pre-announcement days of November, only one-half a point better than October. After the announced election results, the Index jumped 7 points to 102.4 and then moved up again to 105.8 in December. The University of Michigan's consumer sentiment Index showed a similar response. Averaging a reading of 91 for the first 10 months of 2016, it jumped to 93.7 in November and 98.2 in December, the highest reading since January 2004.
Seventy-three percent of the gain in the Index was accounted for by more positive views about business conditions six months from December and improvements in real sales volumes. Improved views about the climate for expansion added another 15 percent, so more optimistic expectations account for 88 percent of the Index's improvement, indicating little improvement in the other seven components and more importantly in the measures directly related to economic growth. Job creation plans did improve 1 point reaching a nine-year high level. Plans to increase inventory investment were unchanged. But there was one piece of good news on this front, capital spending plans going forward bumped up 5 percentage points. Capital expenditures have been a real laggard in this recovery because the outlook for earning a decent after-tax return on the investment with low consumer sentiment on top of an avalanche of costly regulations and higher taxes was not good. The Federal Reserve responded to this problem with low interest rates, but that did not overcome the larger handicap.
If this optimism continues, it will translate into spending plans as in the case of capital spending plans in December and ultimately into reports of actual hiring, inventory spending and capital outlays. Trump and the republican Congress have the momentum, but maintaining it will likely be a challenge as the political process takes hold.
Market expectations (from Bloomberg / Econoday) was a reading between 98.9 to 100.0 (concensus 99.6) with the reported value at 105.8. Said Juanita Duggan, President and CEO of the National Federation of Independent Business (NFIB):
Explained NFIB Chief Economist Bill Dunkelberg:
The Index reached 105.8, an increase of 7.4 points. Leading the charge was "Expect Better Business Conditions," which shot up from a net 12 percent in November to a net 50 percent last month.
Despite sharply higher optimism, hiring activity remained flat in December. Job creation increased by 0.01 workers per firm and job openings
Some other highlights of this Optimism Index include:
Optimism Index Summary. The Index of Small Business Optimism rose 7.4 points to 105.8, the highest reading since December 2004. Seven of the 10 Index components posted a gain, 2 declined and 1 was unchanged. Expectations for real sales gains and outlook for business conditions accounted for 73 percent of the gain. The percent of owners viewing the current period as a good time to expand is now triple the average level in the recovery. GDP related hiring and inventor investment showed little gain. Capital spending though, the laggard in this recovery, posted a strong advance, both in reported outlays and plans for spending in the first half. Job creation plans remained at the highest levels seen since 2007. Reports of compensation gains were robust while reports of higher prices, though the highest all year, were infrequent.
Labor Markets. In spite of rising post-election optimism, reported job creation remained weak in December with the seasonally adjusted average employment change per firm posting a gain of 0.01 workers per firm, positive, but barely. Thirteen percent (up 1 point) reported increasing employment an average of 2.2 workers per firm and 9 percent (down 4 points) reported reducing employment an average of 4.6 workers per firm (seasonally adjusted). Fifty-one percent reported hiring or trying to hire (down 7 points), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (down 4 points). Twenty-nine percent of all owners reported job openings they could not fill in the current period, down 2 points, but from November's highest reading in this recovery. This indicates that labor markets remain tight. Eleven percent reported using temporary workers, down 5 points, a surprising drop. A seasonally adjusted net 16 percent plan to create new jobs, up 1 point and the strongest reading in the recovery. Historically, the NFIB job openings data have been a strong predictor of the unemployment rate. The unemployment rate is expeceted to remain steady or perhaps rise if higher consumer sentiment encourages more labor force participation. High levels of job openings also suggest that job growth might be muted by hiring difficulties.
Inventory. The net percent of owners reporting inventory gains gained 6 points to a net 3 percent (seasonally adjusted), a rather strong report, as long as those inventories are built to meet rising consumer demand and not a result of weakening sales. The net percent of owners viewing current inventory stocks as "too low" improved 1 point to a net negative 3 percent, still more feeling stocks are too high than too low. The surge in expected sales gains should absorb some of these "excess stocks". The net percent of owners planning to add to inventory improved was unchanged a net 4 percent, a good number reflecting expected stronger demand.
Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 1 percentage point to a net negative 7 percent. The surge in consumer optimism did not produce a noticeable improvement in sales at small businesses, perhaps because of the growth of internet sales which might detract from retail holiday business. Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 20 points, after a 10 point rise in November, to a net 31 percent of owners, the highest reading since October 2005 with a reading of 40 percent. The reduction of "policy anxiety" is surely responsible for some of the remarkable improvements in sales expectations and rising consumer sentiment. The expectation of important cost relief from deregulation and tax reform is strong among small business owners and consumers, all of which is yet to be accomplished and has a hard political road to travel. But the data indicate that business owners are indeed very optimistic.
Inflation. The net percent of owners raising average selling prices was a net 6 percent (up 1 point). The net percent raising prices has been virtually 0 all year, but November and December presented opportunities for owners to raise prices a bit. Eleven percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 13 percent reported price increases (down 1 point). Seasonally adjusted, a net 24 percent plan price hikes up 5 points after a 4 point gain in November. Inflation requires an environment in which demand (spending) pushes against the ability of the economy to supply output. This does not describe most of the economy with the possible exception of housing where new construction seems to be lagging demand and, hence, more price increases (7 percent recently), substantial in some markets. House prices are not included directly in the price indices, so inflation there must find its way to the inflation measures through rising rents and the "owner occupied rental equivalent" computation which accounts for 40 percent of the CPI for example.
Compensation and Earnings. Reports of increased compensation rose 5 points to 26 percent, the second best reading in 2016. The market for "qualified" workers is clearly tight, as recovery high levels of owners categorize the lack of qualified workers as their top business problem. However, owners are having little success in passing higher labor costs along to customers as the frequency of reported price hikes remained low in comparison. Earnings trends improved 6 points to a net negative 14 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor. But rising labor costs, due to shortages or more widely to government regulation, will continue to pressure the bottom line until demand is strong enough to support rising selling prices.
Credit Markets. Four percent of owners reported that all their borrowing needs were not satisfied, unchanged over the past few months. Twenty-nine percent reported all credit needs met (down 1 point), and 52 percent explicitly said they did not want a loan. However, including those who did not answer the question, presumably uninterested in borrowing, 67 percent of owners have no interest in borrowing. Record numbers of firms remain on the "credit sidelines", seeing no good reason to borrow yet, in spite of the surge in optimism. As optimism is translated into spending plans, borrowing activity should pick up. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 19 percent citing regulations and red tape, and 12 percent each the availability of qualified labor and weak sales. Thirty percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans declined 10 basis points to 5.5 percent. Overall, loan demand remains historically weak, owners not able find many good reasons to borrow and invest, even with abundantly cheap money. If the positive expectations for real sales and business conditions observed after the election prevail in the coming months, this trend may start to reverse. The net percent of owners expecting credit conditions to ease in the coming months was a negative 6 percent. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending appreciably. The "Trumpian surge" has yet to translate into spending plans to a significant degree.
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