NFIB Report March 2018: Small business optimism reaches 16th consecutive month of historically high readings

Bill Dunkelberg

Taxes received the fewest votes since 1982 as top problem for owners.

The small business optimism index reached its 16th consecutive month in the top five percent of 45 years of survey readings, according to the NFIB Small Business Economic Trends survey, released today. The 104.7 March reading, down from 107.6 in February, remains among the highest in survey history and for the first time since 1982, taxes received the fewest number of votes as the number one problem. Taxes as the number one problem has declined since November 2017, the month before the tax bill passed, from 22% to 13 percent in March.

“It has been a remarkable 16 months for small business optimism,” said NFIB President and CEO Juanita Duggan. “This is the first time in 35 years where the fewest number of small business owners have told us that taxes are their number one business problem. They’ve been so optimistic that they feel confident enough to raise wages and invest in their business, which grows the economy.”

Survey components include a net 20% of owners are planning to create jobs, up two points from last month. Reports of improved earnings trends were the second best since 1987. Twenty-eight percent believe now is a good time to expand, down four points from February but continues a solid reading.

Small business owners expecting better business conditions fell 11 points to a net 32% and expected sales fell to a net 20%, though both remain at historically high levels.

“Although expected sales and expected business conditions posted large declines, it was from historically high levels and this still left the overall Index reading among the 20 best in survey history,” said NFIB Chief Economist Bill Dunkelberg. “Hiring and spending on new buildings and land acquisition remained at strong levels, a good sign of confidence in economic prospects.”

Twenty-six percent plan capital outlays in the next few months, down three points from February. Plans were the most frequent in manufacturing, where there is a demand for productivity-enhancing investments. A seasonally-adjusted net 8% of owners reported higher nominal sales in the past three months.

As reported in NFIB’s Jobs Report on Thursday, labor quality remains as the top issue facing small business owners, with 89% of those hiring or trying to hire reporting few or no qualified applicants. Down one point from February, 21% selected Finding Qualified Laborers their top business problem, above taxes, weak sales, or the cost of regulations as their top challenge. A net 19% reported plans to raise compensation in response to the tight labor market.

“Small businesses have led the economy to what appears to become 12 months of 3% GDP growth,” said NFIB Chief Economist Bill Dunkelberg. “It is evident that the small business sector has responded positively to the current management in Washington and its economic policies.”

Profit trends declined one point to a net -4% reporting quarter on quarter profit improvements, one of the best readings in survey history. Reports of earnings gains surged 11 points in January and hasn’t gone down since.


Job creation remained solid in the small business sector as owners reported a seasonally-adjusted average employment change per firm of 0.36 workers, one of the best readings in survey history. Fifty-three percent reported hiring or trying to hire (up 1 point), but 47% (89% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-one percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, exceeding the percentage citing taxes or regulations. Thirty-five percent of all owners reported job openings they could not fill in the current period. A seasonally-adjusted net 20% plan to create new jobs, up 2 points from February and at historically high levels. The availability of qualified workers will undoubtedly moderate actual job growth, even if the labor force participation rate picks up again.


A net 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, unchanged and the fourth consecutive strong month. The net percent of owners expecting higher real sales volumes fell 8 points, to a net 20% of owners. The decline is surprising in light of the continuing good news for jobs and the economy, as well as continued reports of better sales from small business owners.

The net percent of owners reporting inventory increases fell 4 percentage points to a net 3% (seasonally adjusted), still positive and extending a three-month run of substantial inventory building. The net percent of owners viewing current inventory stocks as “too low” was a net negative 6%, down 3 points, suggesting that current stocks are looking more excessive in light of diminished sales expectations. Consistent with weaker sales expectations and dissatisfaction with current stocks, the net percent of owners planning to build inventories fell 3 points to 1%.


Fifty-eight percent reported capital outlays, down 8 points from February’s impressive reading (highest since 2004). Of those making expenditures, 39% reported spending on new equipment (down 6 points), 24% acquired vehicles (down 6 points), and 16% improved or expanded facilities (up 1 point). Eight percent acquired new buildings or land for expansion (up 2 points) and 12% spent money for new fixtures and furniture (down 3 points). Twenty-six percent plan capital outlays in the next few months, down 3 points.


Reports of higher worker compensation rose 2 points to a net 33%, the highest reading since 2000. Owners complain at record rates of labor quality issues, with 89% of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Perhaps the recent gain in labor force participation has reduced the pressure to raise compensation a bit as hiring became somewhat easier. The decline in temporary employment as new jobs were added at a record high rate seems to support this view. The frequency of reports of positive profit trends declined 1 percentage point to a net negative 4% reporting quarter on quarter profit improvements, still one of the best readings in survey history. Reports of earnings gains surged 11 points in January and has remained elevated over the last two months.


The net percent of owners raising average selling prices rose 3 points to a net 16% seasonally adjusted, after a 3-point increase in both February and January. Seasonally adjusted, a net 25% plan price hikes (up 1 point), the highest reading since 2008. With reports of increased compensation running high, there is more pressure to pass these costs on in higher selling prices, although tax cuts and growing operating profits alleviate some of this pressure.


Four percent of owners reported that all their borrowing needs were not satisfied, up 2 points and historically low. Thirty-one percent reported all credit needs met (down 1 point) and 47% said they were not interested in a loan, down 4 points. Only 2% reported that financing was their top business problem compared to 21% citing the availability of qualified labor. Four percent reported loans “harder to get”, historically low. In short, credit availability and cost are not issues and haven’t been for many years, even with the Federal Reserve raising interest rates. Thirty-two percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans was up 40 basis points at 6.1%.


Growth in the fourth quarter was revised up to 2.9%, leaving growth at 3% for the last nine months of 2017. If the first quarter this year comes in at or close to 3%, the economy will have logged a full 12 months of 3% GDP growth, 50% better than growth in the prior administration. Job growth continues to produce high numbers and the labor force participation rate has improved as jobs are more plentiful.

The Federal Reserve is expected to raise rates several more times this year and continue its plan to not reinvest proceeds from maturing bonds in its portfolio. By itself, this reduces the demand for bonds and thus raises interest rates. Putting more pressure on rates is the Treasury’s need to sell a lot of bonds to finance the deficit, which imposes additional pressure on rates (higher rates must be paid to get private investors to take them). Rising interest rates will, of course, not be a positive development for equity prices or asset prices in general. Interest rates on variable price loans will rise. Less clear is the impact on long-term rates, but they are likely to continue to move higher.

The percent of owners reporting higher average selling prices has risen steadily since October 2016, from a net 2% to a net 16%. This should raise the overall average increase in average prices for the economy. The Federal Reserve has predicted that the inflation rate would rise to 2% and then stay there (without explaining how the inflation rate would stop rising). Using 45 years of NFIB and inflation data makes it clear that serious inflation for the economy is dependent on serious inflation on Main Street – lots of firms raising average selling prices. So far, the percent raising prices is not supportive of serious inflation, but a clear trend has been established. A look at past inflation makes clear that the price of “things” has been falling steadily while the price of labor-intensive “services” has been increasing. The small business sector is “labor intensive” and labor services are rising in cost, whether in areas like healthcare or in construction. Reports of compensation gains are running well ahead of reports of price increases, but the gap is narrowing.

The big picture remains solid, with small firms as optimistic, and inclined to spend and hire as they have ever been. Tax cuts will start to impact firms directly and positively impact their customers. Economic growth will continue to be strong and that will spur more capital investment and hiring on Main Street.

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

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