NFIB Report April 2017: Small business optimism still high but expectations deflate after Obamacare miscue

Bill Dunkelberg

The NFIB Index of Small Business Optimism posted another historically high reading in April, but expectations for future business conditions plunged by eight points, a sign that business owners were shaken by Congress’ failure at the end of March to repeal and replace Obamacare.

“Small business owners were measurably shaken when Congress failed to address one of their most important concerns,” said NFIB President and CEO Juanita Duggan. “Obamacare has crushed small businesses. Small business owners expected the White House and Congress to address that problem. Their failure to do so caused volatility in the Optimism Index.”

The Index dipped 0.2 points April, settling at 104.5. April was the sixth straight month for historically high optimism, a hot streak not seen since 1983. Five of the Index components posted a gain, reaching levels not seen since before the previous administration. Three of the components declined, and two were unchanged. Nearly all of the slight decline was attributable to an 8-point plunge in expected business conditions. Most of the data were collected immediately after Congress failed to repeal and replace Obamacare.

“Expected business conditions is the most volatile component of the Index,” said NFIB Chief Economist Bill Dunkelberg. “Small business owners want Congress and the White House to address the high cost of health care, which has been their top concern for more than 30 years. When that effort failed in March, expectations for better business conditions collapsed.”

The House narrowly passed a bill last week to repeal most of Obamacare. Whether expectations for better business conditions will recover in the May Optimism Index remains to be seen.

“Congress and the White House must understand that small business owners are paying close attention, and they are making decisions that affect the economy based on how Washington performs,” said Duggan. “The drop in expected business conditions should be a warning to Washington that health care reform, regulatory reform, and tax reform have implications far bigger than politics.”

Duggan noted that taxes jumped to the top of the list of concerns among small business owners in the April survey, with 21 percent listing it as their single most important problem.

“That should be a clear indication for Congress and the White House to finish health care reform and move quickly to tax reform, she said. The current tax code strongly favors large corporations over small businesses. Five of the top 10 concerns among small business owners are related to taxes. The tax system is a major burden for small businesses and an impediment to economic growth. Fixing that system must be an urgent priority for Congress and the White House.”

Small business owners reported a seasonally adjusted average employment change per firm of 0.19 workers per firm, a very strong showing and not consistent with last month's Bureau of Labor Statistics (BLS) Payroll Survey number which was a surprise on the low side, but was in agreement with the Household Survey number. Fourteen percent (up 2 points) reported increasing employment and average of 2.2 workers per firm and 10% (up 1 point) reported reducing employment an average of 3.5 workers per firm (seasonally adjusted). Fifty-five percent reported hiring or trying to hire (up 4 points), but 48% reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent of owners cited the difficulty of finding qualified workers as their Singe Most Important Business Problem (unchanged), far more than were concerned with weak sales. Thirty-three percent of all owners reported job openings they could not fill in the current period, up 3 points, and the highest reading since November 2000, the peak of the last expansion. Ten percent reported using temporary workers, down 3 points. A seasonally adjusted net 16% plan to create new jobs, unchanged and a very strong reading.

The net percent of owners reporting net inventory increases fell 1 point to a net -1% (seasonally adjusted), confirming and end to the accumulation reported in January which was strong. Shedding the excess stocks accumulated early in the 1st quarter lowered 1st quarter GDP estimates. The net percent of owners viewing current inventory stocks as "too low" improved 2 points to a net -3%, as firms trimmed their excess inventory stocks in the 1st quarter.

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%, the best reading since May 2015, the last time it registered a positive reading prior to 2017. This measure has been positive in only 6 months since 2007 and as low as -35%. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 2 points to a net 20% of owners.

Fifty-nine percent reported capital outlays, down 5 points after a surge in February;and March. Of those making expenditures, 42% reported spending on new equipment (down 4 points), 26% acquired vehicles (unchanged), and 14% improved or expanded facilities (down 1 point). Six percent acquired new buildings or land for expansion (up 1 point) and 11% spent money for new fixtures and furniture (down 5 points). Overall, capital expenditures were solid after displaying some modest exuberance in the prior 2 months. The percent of owners planning capital outlays in the next 3 to 6 months dropped 2 points to 27%, just below the highest reading in the recovery but well below historical levels for periods of growth.

The net percent of owners raising average selling prices was a net 5% (down 1 point). Twelve percent of owners reported reducing their average selling prices in the past 3 months (up 2 points), and 19% reported price increases (up 3 points). 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% plan price hikes (unchanged). 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.

Reports of increased compensation fell 2 points to a net 26%, one of the best reading since February 2007 but below the recovery record level reaching in January. Owners complain at recover record rates of labor quality issues, with 87% of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A near-recovery record 16% selected "finding qualified labor" as their top business problem, almost as many as cite the cost of regulatory compliance as their top challenge. Actual earning was unchanged, a net -9% reporting quarter on quarter profit improvements, historically an excellent reading and the best in this expansion.

Only 3% of owners reported that all their borrowing needs were not satisfied (down 1 point). Thirty-two percent reported all credit needs were met (unchanged), and 50% explicitly said they did not want a loan. However, including those who did not answer the question, 65% of owners have no interest in borrowing. Only 2% reported that financing was their top business problem compared to 21% citing taxes, 17% citing regulations and red tape, and 16% the availability of qualified labor. Weak sales garnered 10% of the vote.

The Affordable Care Act (ACA), Obamacare, was a predictable failed experiment. Sadly, after 7 years since it's passage, the ACA "details" are still being "written" by the bureaucrats. Debate in the House marked by serious doubts among Republicans and severe opposition by Democrats and too little leadership from the White House. The health care vote in the House repairs some of that dynamic, but it remains to be seen how small business owners will respond to these efforts in next month's survey.

The 1st quarter GDP number was weaker than expected, due to changes in inventory investment, slower auto sales and a negative trade gap. The economy is stronger than 0.7% growth, capital spending is better and inventory reductions will reverse.

The Federal Reserve may decide that even though the economy is better than "0.7", the optics of raising rates would not be good and therefore they will defer their two remaining rate hikes to later meetings. There is not chance they will do an "inter-meeting hike" as Greenspan was willing to do. The Fed will continue to conduct this "monthly monetary policy" process. refusing to establish a longer term program of more predictable policy. Doing this each month produces much uncertainty in financial markets. Traders love this and much money is made in trading by the big banks rather than in traditional lending. In the meantime, hesitancy at the Fed raises uncertainty about the future of economic growth.

Small business owners have held on to their optimism, and have reported improvements in activities that signal more growth in the real economy, even if modest. If Congress does not disappoint, small firms are ready to bet on a more optimistic future by investing in their businesses and hiring more workers.

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