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posted on 08 August 2017

July 2017 Small Business Optimism Improves

from the National Federation of Independent Business

The Index of Small Business Optimism rose 1.6 percent in July to 105.2, a strong performance led by significant gains in hiring activity.

[editor's note: Market expectation from Bloomberg / Econoday was between 102.0 to 104.0 (consensus 103.2) versus the actual reading of 105.2.]

Said NFIB President and CEO Juanita Duggan:

Strong consumer demand is boosting small business optimism. Small business owners are feeling better about the economy because their customers are feeling better about the economy. This is a good trend that we hope continues.

Among the 10 components that make up the Index, seven improved, two declined, and one remained unchanged. The biggest gains were: job openings (+5); job creation plans (+4); and sales expectations (+5).


Said NFIB Chief Economist Bill Dunkelberg:

Sixty percent of small business owners reported hiring or trying to hire in July. Within that group, 87 percent said they had a tough time finding qualified workers. The labor market is getting very tight, and the problem is most severe in the construction and manufacturing sectors.

Business owners cite "lack of specific skills" as the main reason they can't find qualified workers, according to new NFIB research included in the July report. Other common reasons include: work history; social skills; wage expectations; and attitude.

Nineteen percent of small business owners listed lack of qualified workers as their number-one problem, second only to taxes.

The number of owners trying to fill positions and create new jobs is very high. That's good news for workers, because they can command higher wages and better benefits. The bad news is that small business employers are finding it very hard to hire and keep their workers.


Report Overview:

The Index of Small Business Optimism rose 1.6 points to 105.2, preserving the surge in optimism that started the day after the election. Seven of the 10 Index components posted a gain, two declined, and one was unchanged. Since the recession, the Index peaked at 105.9 in January, just 0.7 points above the July reading. Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, D.C. The economy (GDP) grew about 2 percent in the first half of the year, nothing special, but the second quarter was much stronger than the first, and consumer spending was a major contributor to growth. The stock market continues to post record high readings, although a bit inconsistent with moderate growth in output from the nation's business sector.

Labor market indicators surged to near-record levels and owners reported strong net hiring over the past few months. Reports of job openings hit a 16-year record high and reports of increases in compensation remained at historically high levels. The frequency of reported price increases was the highest since 2014, but still historically low. Inventory investment plans strengthened supported by stronger consumer spending. Reports of capital outlays were unchanged and plans to spend faded a little. Capital investment is still not supportive of stronger economic growth. Expectations for improved business conditions and higher real sales posted strong gains, anticipating a stronger second half economy.

Some other highlights of this Optimism Index include:

Labor Markets. Small business owners reported an adjusted average employment change per firm of 0.21 workers per firm over the past few months, a solid performance. Thirteen percent (up 3 points) reported increasing employment an average of 4.5 workers per firm and 11 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). Sixty percent reported hiring or trying to hire (up 6 points), but 52 percent (87 percent of those hiring or trying to hire) 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 4 points), second only to taxes. This is a particularly severe problem in construction (28 percent) and manufacturing (21 percent) where labor shortages are the top problem, trumping taxes and regulatory costs. According to a recent NFIB small employer survey, the most "typical" reason for "disqualification" of an applicant was a lack of specific job skills (cited by 26 percent of employers), followed by a poor work history (16 percent). Poor English and math skills typically disqualified 10 percent of the applicants. A lack of social skills disqualified 14 percent, unreasonable wage expectations 14 percent, attitude 12 percent, and appearance 8 percent, all factors that the applicant could easily improve without additional training if they really wanted a job. Drug issues were a typical reason for disqualification for 10 percent of the owners and legal status for 6 percent.

Credit Markets. Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-one percent reported all credit needs met (up 4 points) and 51 percent explicitly said they were not interested in a loan, down 3 points. Including those who did not answer the question, 66 percent of owners have no interest in borrowing, down 3 points. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes. Sixteen percent citing regulations and red tape, and 19 percent the availability of qualified labor. Weak sales garnered 8 percent of the vote. Thirty percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans was up 30 basis points at 5.9 percent. Overall, loan demand remains historically weak, even with cheap money. Small businesses have been restructuring over the past ten years and profit trends are now at historically good levels. Owners are in a good position to borrow again once they have a good reason to do so.

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 a net 0 percent, a 4-point improvement over June. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 5 points, increasing to a net 22 percent of owners. Stronger sales expectations are very supportive of the record hiring plans and strong inventory investment plans recorded in July.

Inventories. The net percent of owners reporting net inventory increases gained 4 points to a net 1 percent (seasonally adjusted), reversing months of inventory stock reductions that were generated by solid consumer spending in the second quarter. The net percent of owners viewing current inventory stocks as "too low" improved 1 point to a net negative 2 percent, as sales expectations changed for the better, requiring higher inventory stocks. The net percent of owners planning to add to inventory rose 1 point to a net 5 percent, the highest reading this year to date and historically normal for a growing economy. This is a positive indicator for second half growth, consistent with the improvement in real sales expectations and future business conditions.

vCapital Spending. Fifty-seven percent reported capital outlays, unchanged. Of those making expenditures, 38 percent reported spending on new equipment (down 2 points), 24 percent acquired vehicles (up 3 points), and 17 percent improved or expanded facilities (up 4 points). Five percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (up 2 points). There is still little evidence that capital spending, which raises worker productivity, is going to increase its contribution to growth anytime soon. Perhaps the decline in reported capital outlays will be reversed in the coming months as the percent of owners planning capital outlays in the next 3 to 6 months fell 2 points to 28 percent, still one of the strongest reading since 2007.

Compensation and Earnings. While inflation remains low, reports of higher worker compensation continue to be strong, consisted with historically tight labor markets. Reports of increased compensation rose 3 points to a net 27 percent. The Federal Reserve is hoping this will result in inflation as owners pass these costs on in the form of higher selling prices. Owners complain at record rates of labor quality issues, with 87 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A record 19 percent selected "finding qualified labor" as their single most important business problem, far more than cite weak sales. Levels this high were last seen at the end of the last expansion in 2000. There is little that government policy can do to deal with this problem short of freeing up the educational system to innovate and respond to market needs. Rising compensation will attract workers back into the labor force, but it is a slow process.

Inflation. The net percent of owners raising average selling prices posted a 7-point increase, rising to a net 8 percent of all firms, and erasing the dramatic decline posted in June. This is the highest reading since 2014, good news for the Federal Reserve which is trying to generate more inflation. Nine percent of owners reported reducing their average selling prices in the past three months (down 2 points) and 18 percent reported price increases (up 4 points). Seasonally adjusted, a net 23 percent plan price hikes (up 4 points). If expectations for sales volumes are realized, some of the price hikes may stick. That said, the Federal Reserve should be delighted that inflation remains well below 2 percent as the economy continues to grow. There is nothing "magic" about a 2 percent inflation target and efforts to create more inflation as a matter of policy invites real danger to economic stability.

source: NFIB

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