posted on 14 March 2017
February 2017 Small Business Optimism: Small Business Owners Continue To Have High Expectations for Washington
from the National Federation of Independent Business
Small business optimism remained at one of its highest readings in 43 years, as small business awaits a new healthcare law, tax reform, and regulatory relief from Washington.
Said NFIB President and CEO Juanita Duggan:
The Index fell 0.6 points in February to 105.3 yet remains a very high reading. The slight decline follows the largest month-over-month increase in the survey's history in December and another uptick in January. Three of the ten components increased, six declined modestly, and one was unchanged. Despite a small decrease, nearly half of owners expect better business conditions in the coming months.
Said NFIB Chief Economist Bill Dunkelberg:
[editor's note: Market expectations (from Bloomberg / Econoday) was a reading between 102.5 to 106.8 (concensus 105.0) with the reported value at 105.3. ]
Some other highlights of this Optimism Index include:
Optimism Index Summary. The Index of Small Business Optimism fell 0.6 points to 105.3, 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, six declined, all by just a few points, and one was unchanged. It is encouraging that the Index has held at 105 for three months now, and not faded. Monthly data were not available in the 1983 recovery for comparison when the record Index reading was last reached. Optimism has not faded, but the enthusiasm has yet to be translated into an equally impressive increase in spending and hiring. This will require progress on the agenda that business owners voted for.
Labor Markets. Small business owners reported a seasonally adjusted average employment change per firm of 0.06 workers, just above the zero line but positive. Fourteen percent (up 1 point) reported increasing employment an average of 1.9 workers per firm and 10 percent (unchanged) reported reducing employment an average of 4.8 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 1 point), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Seventeen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 2 points), revisiting the high for this recovery and the best reading since 2007. Thirty-two percent of all owners reported job openings they could not fill in the current period, up 1 point, the highest reading in this recovery. This is one of the tightest labor markets in the 43-year history of the NFIB survey. Twelve percent reported using temporary workers, down 1 point. A seasonally adjusted net 15 percent plan to create new jobs, down 3 points but still a very strong reading.
Capital Spending. Sixty-two percent reported capital outlays, up 3 points and the second highest reading since 2007. Of those making expenditures, 45 percent reported spending on new equipment (up 3 points), 26 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 16 percent spent money for new fixtures and furniture (up 3 points). Overall, a decent report on spending. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 26 percent, just shy of the highest reading in the recovery. Although these are high readings for the recovery, they are historically weak and have yet to reflect the optimism about sales and business conditions that occurred when President Trump was elected. Reports of actual outlays appear to be trending up, but still remain well below those observed in "good times". Growth takes more than optimism, it takes more spending, at least rising to historically normal levels.
Inventory. The net percent of owners reporting inventory increases fell 2 points to a net 1 percent (seasonally adjusted), extending the accumulation reported in January. This will be positive for GDP growth, and will hopefully be absorbed by stronger spending rather than depressing future investment in inventory stocks. The net percent of owners viewing current inventory stocks as "too low" improved 3 points to a net negative 2 percent. The surge in expected sales gains should make some of these "excess stocks" look better. The net percent of owners planning to add to inventory rose 1 point to a net 3 percent - not strong, but positive.
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 4 percentage point to 2 percent, the first positive reading since early 2015. This measure has been positive in only six months since 2007, with the lowest recession reading of net negative 35 percent. Consumer optimism soared after the election and is lifting actual sales, but at a slow pace. Seasonally adjusted, the net percent of owners expecting higher real sales volumes fell 3 points to a net 26 percent of owners, this after a 20 point rise in December. This leaves expectations at very positive levels but not yet confirmed by actual improvements in sales trends.
Inflation. The net percent of owners raising average selling prices was a net 6 percent (up 1 point). Ten percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 16 percent reported price increases (up 1 point). The frequency of reported price hikes has ticked up since November, but not enough to produce a lot of inflation. Seasonally adjusted, a net 20 percent plan price hikes (down 1 point). National price indices are creeping up but show no tendency to surge ahead. Some markets in which demand is pressing against supply are experiencing more rapid price increases. Both home prices and rents are rising much faster than the overall price indices.
Compensation and Earnings. Reports of increased compensation fell 4 points to 26 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. A recovery record 17 percent ranked "finding qualified labor" as their top business problem ahead of regulations, weak sales and insurance costs. Only taxes received more "votes" as the top problem. The inability of firms to raise prices limits the extent to which firms can raise worker compensation. But rising labor costs, due to shortages, or, more widely, to government regulations will continue to pressure the bottom line until demand is strong enough to support rising selling prices. Earnings trends deteriorated 1 point to a net negative 13 percent reporting quarter on quarter profit improvements.
Credit Markets. Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point. Thirty 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, 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 22 percent citing taxes, 15 percent citing regulations and red tape, and 17 percent the availability of qualified labor. Weak sales garnered 12 percent of the vote. Thirty-one percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans fell 30 basis points to 5.4 percent. Overall, loan demand remains historically weak, even with cheap money. If the positive expectations for real sales and business conditions are translated into actual spending on capital equipment, expansion and inventory investment, borrowing activity should pick up. The net percent of owners expecting credit conditions to ease in the coming months was unchanged at a negative 3 percent. The Federal Reserve is expected to raise rates in March, but that will still leave money costs historically low. As owners' confidence in the economy and economic policies rises, they will be more likely to convert their optimism into actual borrowing to support spending.
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