NFIB Report December 2017: Average monthly optimism sets all-time record in 2017

Bill Dunkelberg

NFIB Small Business Optimism Index for December caps a history-making year.

Small business confidence blasted off the day after the 2016 election and remained in the stratosphere for all of 2017, making last year an all-time record setter for the NFIB Index of Small Business Optimism, released today.

“2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index,” said NFIB President and CEO Juanita Duggan. “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.”

The Optimism Index for last month came in at 104.9, slightly lower than the near-record November report but still a historically exceptional performance. That makes 2017 the strongest year ever in the history of the survey. The average monthly Index for 2017 was 104.8. The previous record was 104.6, set in 2004.

“We’ve been doing this research for nearly half a century, longer than anyone else, and I’ve never seen anything like 2017,” said NFIB Chief Economist Bill Dunkelberg. “The 2016 election was like a dam breaking. Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

Two of the December components posted gains, five declined, and three remained unchanged. Moving the Index moderately lower were declines in Expected Better Business Conditions (11-point decline) which tends to fluctuate sharply and Inventory Plans (8-point decline). Small business owners were bedeviled by a labor shortage in 2017 that grew more intense as optimism rose. The NFIB Jobs Report last week showed that problem reaching record levels.

Offsetting the dip in Expected Better Business Conditions was a dramatic,14-point improvement in Actual Sales for December. In November, a net -5% of all firms reported sales increases. A net 9% reported higher sales in December, indicating a very strong holiday season for small business.

“There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses,” said Dunkelberg. “They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.”

Driving record optimism in 2017 was the expectation of better economic policies from Washington. Suspending the regulatory assault on business and now a massive tax cut answered two of the three top concerns for small business owners, according to NFIB research.

“The lesson of 2017 is that better policies make for better economic results,” said Duggan. “The evidence is overwhelming that small business owners pay close attention to Washington, and that federal policies affect their decisions on whether to hire, whether to invest, whether to grow inventory, and whether to seek capital.”

Job creation was slow in the small-business sector as owners reported a seasonally adjusted average employment change per firm of 0.01 workers. Clearly, a lack of “qualified” workers is impeding the growth in employment. Thirteen percent (unchanged) reported increasing employment an average of 2.0 workers per firm and 10% (unchanged) reported reducing employment an average of 4.1 workers per firm (seasonally adjusted). Fifty-nine percent reported hiring or trying to hire (up 7 points), but 54% (92% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill, a record high. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), second only to taxes. This is the top ranked problem for those in construction (30%) and manufacturing (27%). Thirty-one percent of all owners reported job openings they could not fill in the current period, up 1 point from November. Twelve percent reported using temporary workers, up 1 point. A seasonally adjusted net 20% plan to create new jobs, down 4 points from a record high reading and the second highest reading since October 1999.

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 9%, a 14-point improvement from November. Tentative customers in November became aggressive spenders across the board in December, closing out the year with very strong reports of sales gains, the best levels since 2006. After a strong surge in November, the net percent of owners expecting higher real sales volumes fell 6 points, falling to a net 28% of owners, still one of the best readings since 2007.

The net percent of owners reporting inventory increases was unchanged at a net -2% (seasonally adjusted). Strong sales resulted in a drawdown in inventories, setting the stage for additional inventory investment in 2018. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net -2%, a positive view of current stocks. The net percent of owners planning to add to inventory fell 8 points to a net -1%, reversing surprisingly strong November investment plans.

Sixty-one percent reported capital outlays, up 2 points. This anticipates a substantial increase in capital spending. Of those making expenditures, 43% reported spending on new equipment (up 3 points), 23% acquired vehicles (down 6 points), and 16% improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (unchanged) and 15% spent money for new fixtures and furniture (up 2 points). Twenty-seven percent plan capital outlays in the next few months, up 1 point from November.

The net percent of owners raising average selling prices fell 2 points to a net 8% seasonally adjusted, ending a steady but modest uptrend in the frequency of reported price increases. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped. Seasonally adjusted, a net 23% plan price hikes (up 1 point), although far fewer will report actually doing so in the following months.

Reports of higher worker compensation were unchanged at a net 27%, historically very strong all last year. Tight labor markets are historically associated with high percentages of owners raising worker compensation. Owners complain at record rates of labor quality issues, with 92% of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Nineteen percent selected “finding qualified labor” as their top business problem, far more than cited weak sales or the cost of regulations as their top challenge. Plans to raise compensation jumped 6 points in frequency to a net 23% in response to tighter labor markets. The frequency of reports of positive profit trends fell 3 points to a net -15% reporting quarter on quarter profit improvements, a solid reading historically but not exceptional.

Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty-two percent reported all credit needs met (unchanged) and 52% said they were not interested in a loan, up 4 points. Only 1% reported that financing was their top business problem compared to 21% citing taxes. Three percent reported loans “harder to get’, down 1 point at historic lows. Thirty-four percent of all owners reported borrowing on a regular basis (up 4 points). The average rate paid on short maturity loans was up 40 basis points at 6.1% after the Federal Reserve raised rates.

The Tax Cuts and Jobs Act was signed into law by the President on December 22, 2017. Compared to the Reagan cuts, this law is more heavily weighted toward “business” because the marginal tax rates for individuals were already quite low compared to pre-1986. More significantly though, the new law recognizes the importance of tax cuts for “pass through” businesses, most of which are small businesses.

The tax bill has its opponent who claim that the bill is “regressive”, assuming little or no economic growth (which drives tax revenues) and no employment benefits (more jobs and higher wages). But despite the critics, the U.S. economy is on track to have 12 months of growth in excess of 3% by the end of the first quarter of 2018.

The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4% for the fourth quarter of 2017. This is a dramatically different picture than owners presented during the 2009-16 recovery under President Obama. The change in the management team in Washington dramatically improved expectations, and that began to translate into increased sales and hiring. Owners did not know exactly what the tax bill would look like, but believed that whatever it looked like, it would be a significant improvement over what was currently in force. That was enough to “bet on”.

As proof, the stock market was up $7 trillion last year, over two million new jobs were created, capital spending lifted off (good for productivity), and housing is running at full tilt. All of this started as soon as the new management team in Washington was elected. Small business owners had it right, their optimism (and subsequent sales and hiring) rose the day after the election results were announced. By the second quarter, 3% growth had been restored as the small business sector (and others) shook off the shackles of pessimism as the new government began eliminating the impediments to growth put in place by the prior administration. The private sector can make good things happen once the heavy hand of government management of the economy is lifted.

Bill Dunkelberg is chief economist of the National Federation of Independent Business (NFIB).

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