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posted on 10 October 2017

September 2017 Small Business Optimism Tumbles

from the National Federation of Independent Business

The NFIB Index of Small Business Optimism tumbled in September from 105.3 to 103 led by a steep drop in sales expectations, not just in hurricane-affected states, but across the country.

[editor's note: Market expectation from Bloomberg / Econoday was between 105.0 to 106.5 (consensus 105.4) versus the actual reading of 103.]

Said NFIB President and CEO Juanita Duggan:

The temptation is to blame the decline on the hurricanes in Texas and Florida, but that is not consistent with our data. Small business owners across the country were measurably less enthusiastic last month.

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).

z%20nfib%20chart.png

Said NFIB Chief Economist Bill Dunkelberg:

The drop-off was consistent around the country regardless of region, and it's likely that members in Florida and Texas were underrepresented in this survey because of the obvious disruptions,. The adjusted average employment change per firm dipped to -0.17, which is a significant drop in hiring activity.

The Index remains very high by historical standards. Small business owners still expect policy changes from Washington on health care and taxes, and while they don't know what those changes will look like, they expect them to be an improvement. But the frothy expectations they've had in the previous few months clearly slipped in September.

z%20nfib%20table.png

Report Overview:

The Index of Small Business Optimism fell 2.3 points to 103.0 in September, a significant decline from August. Three of the 10 Index components posted a gain, six declined and one was unchanged. Two of our largest states, Florida and Texas, were devastated by hurricanes in the survey period; however, the response rate in those states was unchanged from prior months. The mail got through, but for large parts of the two states, "shopping" was not possible. Tens of thousands of houses were probably lost and a half million cars rendered inoperable. Hurricane recovery spending will provide a significant boost to economic activity in the fourth quarter and into 2018, reducing the odds of a recession next year. The news about tax reform came out too late to have a significant impact on expectations, the October survey will reflect whatever impact that debate will have.

Some other highlights of this Optimism Index include:

Labor Markets. Job creation weakened in the small business sector as business owners reported an adjusted average employment change per firm of -0.17 workers. Decreases were reported by owners in six of the nine Census regions, so it wasn't just a hurricane effect. Twelve percent (down 2 points) reported increasing employment an average of 2.7 workers per firm and 13 percent (up 1 point) reported reducing employment an average of 2.0 workers per firm (seasonally adjusted). Fifty-seven percent reported hiring or trying to hire (down 2 points), but 49 percent (86 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 (unchanged), second only to taxes. This is the top ranked problem for those in construction (30 percent) and manufacturing (28 percent), getting more votes than taxes and regulations. Thirty percent of all owners reported job openings they could not fill in the current period, down 1 point. Eleven percent reported using temporary workers, down 2 points. A seasonally adjusted net 19 percent plan to create new jobs, up 1 point from August, a strong reading.

Capital Spending. Fifty-nine percent reported capital outlays, down 1 point. Of those making expenditures, 39 percent reported spending on new equipment (down 3 points), 23 percent acquired vehicles (down 1 point), and 13 percent improved or expanded facilities (down 3 points). Six percent acquired new buildings or land for expansion (down 1 point) and 12 percent spent money for new fixtures and furniture (up 3 points). The percent of owners planning capital outlays fell 5 points to 27 percent. The recovery from the hurricanes will undoubtedly raise these numbers. Plans were most frequent in agriculture (29 percent), the wholesale trades (28 percent), and manufacturing (38 percent). 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 3 percent, a 3-point improvement over July. Improved consumer spending is showing up on Main Street, with help from residential construction and home sales that are buoying firms in construction, finance, insurance and real estate, all large segments of the small business sector. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 5 points, rising to a net 27 percent of owners, this on top of a 5- point jump in July. Stronger sales expectations are very supportive of the historically high hiring plans and strong inventory investment plans.

Sales and Inventories. 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 1 percent, a 2 point decline from August. Seasonally adjusted, the net percent of owners expecting higher real sales volumes lost 12 points, falling to a net 15 percent of owners, this after large gains in July and August. What triggered such a large decline in expectations is less clear, as reports on the economy (e.g. 3.1 percent GDP growth in the second quarter etc.) were fairly good. Respondents in Florida and Texas were no less optimistic than their counterparts in the rest of the country. The net percent of owners reporting inventory increases fell to a net negative 2 percent (seasonally adjusted), a decline of 3 points, indicating more inventory reduction than in August. The net percent of owners viewing current inventory stocks as "too low" gained 2 points to a net negative 3 percent. The net percent of owners planning to add to inventory rose 5 points to a net 7 percent.

Credit Markets. Two percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-three percent reported all credit needs met (down 1 point) and 51 percent said they were not interested in a loan, up 2 points. Only 1 percent reported that financing was their top business problem compared to 21 percent citing taxes, 16 percent citing regulations and red tape, and 19 percent the availability of qualified labor. Twenty-nine percent of all owners reported borrowing on a regular basis (down 2 points). The average rate paid on short maturity loans was up 10 basis points at 5.6 percent, little changed even as the Federal Reserve raises rates.

Compensation and Earnings. Reports of higher worker compensation fell 3 points to a net 25 percent, still historically strong. The Federal Reserve is hoping this will result in inflation as owners pass these costs on in the form of higher selling prices, but to date, their wish has not been granted to any significant degree. Plans to raise compensation rose 3 points in frequency to a net 18 percent, a logical response to labor market tightness. The frequency of reports of improved profit trends was unchanged at a net negative 11 percent reporting quarter on quarter profit improvements, historically a solid reading and one of the best readings in this expansion.

Inflation. The net percent of owners raising average selling prices declined 3 points to a net 6 percent. Clearly, inflation is not "breaking out" across the country as the Federal Reserve hoped. Ten percent of owners reported reducing their average selling prices in the past three months (up 1 point), and 15 percent reported price increases (down 2 points). Seasonally adjusted, a net 19 percent plan price hikes (down 1 point), a figure that has typically been 2 to 3 times larger than the percent that a month later report actually raising prices.

source: NFIB


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