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posted on 13 June 2017

May 2017 Small Business Optimism Continues Flying High

from the National Federation of Independent Business

Small business confidence shot up to near record levels last November and is still flying high, according to the latest National Federation of Independent Business (NFIB) Index of Small Business Optimism.

[editor's note: Market expectation from Bloomberg / Econoday was between 102.0 to 105.0 (consensus 104.0) versus the actual reading of 104.5.]

Said NFIB President and CEO Juanita Duggan:

"The remarkable surge in optimism that began last year right after the election shows no signs of slowing down. Small business owners are highly encouraged by the President's regulatory reform agenda, and they remain optimistic there will be tax reform and health-care reform. This is a policy-driven phenomenon.

If Congress wants small businesses to invest in the economy, then they must cut taxes and simplify the code. The President's tax plan would slash taxes for small businesses and level the playing field for businesses of every size and structure. Congress also has other good ideas for tax reform, but they need to stop talking and pass a bill.

We know, based on our data, that small business owners are watching very closely what is happening in Washington. The optimism is based on the expectation of policy changes, and that means tax reform.

The Index for May matched its strong performance in April of 104.5. That means the Index has been at a historically high level for six straight months. Five of the Index components posted a gain, four declined, and one remained unchanged.

The average employment change per firm was 0.34, which puts hiring activity in May near the highest levels in the 43-year history of the Index. Fifteen percent of owners reported hiring three workers per firm, 9 percent reported cutting 2.3 workers per firm.

A strong majority of owners, 59 percent, reported hiring or trying to hire in May, although 51 percent said they found few or no qualified workers. Remarkably, that was a problem for 86 percent of owners who said they tried to hire. Nineteen percent of all owners in the survey said finding qualified workers was their top concern, making it the second-biggest problem for small business.


Said NFIB Chief Economist Bill Dunkelberg:

"The tight labor market has been a persistent problem for small business owners for the past several months, and the problem appears to be getting worse," said NFIB Chief Economist Bill Dunkelberg. "It's forcing small business owners to increase compensation, which we're seeing in this data, to attract new workers and keep the ones they have. But it also means a lot of small business owners are short-handed. They can't keep up with customer demand because the labor pool isn't producing enough qualified workers. It's a significant structural problem in the economy that policymakers will have to watch."

"Typically, in a strong economy, we see a lot more spending on capital," said Dunkelberg. "We're seeing increased hiring activity and some other positive signs, but the capital-outlays component is the missing ingredient for robust economic growth."


Report Commentary:

The small business sector remains poised to do its part to contribute to overall economic growth. The heavy burden of taxes, health insurance and regulations must be eliminated to support their efforts. The New York Federal Reserve estimates second quarter growth at 2.2 percent while the Atlanta Federal Reserve anticipates growth at 3.4 percent. To appreciate the magnitude of that gap, 1.2 percentage points is equal to or greater than the growth of the entire economy in many quarters over the past eight years. Removing the penalties embedded in our tax code and regulatory structure which waste valuable time and hours will do much to speed up the growth rate, making the U.S. a growth leader.

Some other highlights of this Optimism Index include:

Optimism Index Summary. The May Index continues the remarkable surge in small business optimism that started the day after the election. Small-business confidence shot up to near record levels last November and still hasn't come down. The Index for May matched its strong performance in April of 104.5. The Index has been at a historically high level for six straight months. In May, five of the Index components posted a gain, four declined, and one remained unchanged. Labor market indicators remained strong, capital spending remained high, and reports of improved sales trends also increased in frequency. However, the inventory picture deteriorated a bit with inventory satisfaction and plans slipping a combined 5 points from April. Overall, the outlook remained solid and more consistent with the revised Q1 2017 GDP growth of 1.2 percent.

Labor Markets. Small business owners hit the hiring pavement with a surge, reporting an adjusted average employment change per firm of 0.34 workers per firm over the past few months. Few readings in the past 43 years of the survey have been higher. Fifteen percent (up 1 point) reported increasing employment an average of 3.0 workers per firm and 9 percent (down 1 point) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted). Fifty-nine percent reported hiring or trying to hire (up 4 points), but 51 percent reported few or no qualified applicants for the positions they were trying to fill. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 3 points), far more than were concerned with weak sales. Thirty-four percent of all owners reported job openings they could not fill in the current period, up 1 point, and the highest reading since November 2000, the peak of the last expansion. Twelve percent reported using temporary workers, up 2 points. A seasonally adjusted net 18 percent plan to create new jobs, up 2 points and the best since November 2006.

Capital Spending. Sixty-two percent reported capital outlays, up 3 points, bouncing back from the 5-point decline in April. Of those making expenditures, 46 percent reported spending on new equipment (up 4 points), 26 percent acquired vehicles (unchanged), and 15 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 14 percent spent money for new fixtures and furniture (up 3 points). The percent of owners planning capital outlays in the next 3 to 6 months increased 1 point to 28 percent, high for the recovery but well below historical levels for periods of growth.

Sales. The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was unchanged at 5 percent, the best reading since May 2015, the last time it registered a positive reading prior to 2017. Until 2017, this measure had been positive in only six months since 2007 and as low as negative 35 percent. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 2 points to a net 22 percent of owners.

Inventories. The net percent of owners reporting net inventory increases fell 1 point to a net negative 1 percent (seasonally adjusted). The net percent of owners planning to add to inventory fell 2 points to a net 1 percent from the highest reading reached in this recovery. Inventory satisfaction deteriorated 3 points to a net negative 6 percent showing more owners with excess stocks. However, this dip should be eased by expected sales gains going forward, useful for meeting expected demand growth.

Inflation. The net percent of owners raising average selling prices was a net 7 percent (unchanged), continuing a modest but steady increase in the percent of owners raising average selling prices. Nine percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 19 percent reported price increases (down 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 21 percent plan price hikes (up 3 points).

Compensation and Earnings. Reports of increased compensation increased 2 points to a net 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 86 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Actual earnings lost 1 point, falling to a net negative 10 percent reporting quarter on quarter profit improvements. The ability to raise prices received little credit for higher profits. The inability of firms to raise prices limits the extent to which firms can raise worker compensation and defend their bottom line. 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. Only 3 percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically very low. Thirty-one percent reported all credit needs met (down 1 point), and 51 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem compared to 22 percent citing taxes, 19 percent citing the availability of qualified labor, and 13 percent regulations and red tape. Twenty-eight percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans was up 50 basis points to 5.9 percent.

source: NFIB

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