NFIB Report November 2017: Small business optimism hits all-time high

Bill Dunkelberg

National Federation of Independent Business (NFIB) Optimism Index Soars Past 107, Closes in On 1983 Record

Not since the roaring Reagan economy has small business optimism been as high as it was in November, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.

“We haven’t seen this kind of optimism in 34 years, and we’ve seen it only once in the 44 years that NFIB has been conducting this research,” said NFIB President and CEO Juanita Duggan. “Small business owners are exuberant about the economy, and they are ready to lead the U.S. economy in a period of robust growth.”

The Index gained 3.7 points in November, a sharp increase over what was already a near-record performance the previous month. Eight of 10 components posted gains, including a stunning and rare 16-point gain in Expected Better Business Conditions and a 13-point jump in Sales Expectations.

“This is the second-highest reading in the 44-year history of the Index,” said NFIB Chief Economist Bill Dunkelberg. “The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4% GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the weak 2009-16 recovery. 

“The change in the management team in Washington has dramatically improved expectations,” he continued.

Job Creation plans increased six points last month, providing more evidence of a strong labor market. The number of owners who said it’s a Good Time to Expand rose four points; Inventory Plans increased by three points; Inventory Satisfaction increased by three points; and Actual Earnings Trend moved up two points.

“Job creation faded, but hiring plans soared, primarily in construction, manufacturing, and professional services,” said Dunkelberg.

Finding qualified workers has been a persistent problem all year for small business owners, a reliable sign of growing economy. Last month, it was the second most important problem facing small business owners. Only taxes polled higher

“Small business owners are paying very close attention to what is happening in Washington,” said Duggan. “They continue to list taxes as their number-one problem, but they now have clear expectations that Congress and the President will address that problem.

“As long as Congress and the President follow through on tax reform, 2018 is shaping up to be a great year for small business, workers, and the economy.”

After several solid quarters, job creation slowed in the small business sector as business owners reported a seasonally adjusted average employment change per firm of 0.0 workers. Thirteen percent (down 1 point) reported increasing employment an average of 3.0 workers per firm and 10% (down 1 point) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 7 points), but 44% (85% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.

Eighteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 2 points), second only to taxes. This is the top-ranked problem for those in construction (33%) and manufacturing (22%), getting more votes than taxes and the cost of regulations. Thirty percent of all owners reported job openings they could not fill in the current period, down 5 points from the record-high level reached in July and October. Eleven percent reported using temporary workers, down 3 points. A seasonally adjusted net 24% plan to create new jobs, up 6 points to a record high reading. Hiring plans were strongest in professional services, manufacturing and construction.

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 -5%, a 6-point decline from October. Consumer spending slowed in November, especially at “brick and mortar” establishments. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 13 points, rising to a net 34% of owners, consistent with reported surges in consumer sentiment from the University of Michigan and the Conference Board.

The net percent of owners reporting inventory increases fell 2 points to a net -2% (seasonally adjusted). Even though sales were weak, owners still reduced their current inventory stocks. The net percent of owners viewing current inventory stocks as “too low” gained 3 points to a net -2%, a more positive view of current stocks. The net percent of owners planning to add to inventory rose 3 points to a net 7%, a solid figure that is supportive of fourth quarter growth. The 7% readings from September and November are the best since 2006.

Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 40% reported spending on new equipment (down 1 point), 29% acquired vehicles (up 5 points), and 16% improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (down 1 point) and 13% spent money for new fixtures and furniture (up 1 point). Twenty-six percent plan capital outlays in the next few months, down only 1 point from October.

The net percent of owners raising average selling prices rose 2 points to a net 10% seasonally adjusted. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped, but the percent of owners raising prices, net of those reducing, has doubled since January, a slow crawl to higher inflation. 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 year. Owners complain at record rates of labor quality issues, with 85% of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Eighteen percent selected “finding qualified labor” as their top business problem, far more than cite weak sales. Plans to raise compensation fell 4 points in frequency to a net 17%, still a solid number, but a surprise as labor markets seem to be getting tighter. The frequency of reports of positive profit trends improved 2 points to a net -12% reporting quarter on quarter profit improvements, a solid reading historically, among the best since 2007.

Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty-two percent reported all credit needs met (up 3 points) and 48% said they were not interested in a loan, down 5 points. Only 2% reported that financing was their top business problem compared to 22% citing taxes, 16% citing regulations and red tape, and 18% the availability of qualified labor. In short, credit availability and cost are not an issue and hasn’t been for many years. Thirty percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans was down 30 basis points at 5.7%, little changed even as the Federal Reserve has been raising rates. Overall, loan demand remains steady, even with cheap money.

President Trump promised that we would get tired of “winning” in his term, a logical perspective because the Republicans have majorities in both houses of Congress and the Presidency. There has been important success on regulatory relief and in restructuring the judiciary, and they are now close to enacting tax reform as the year winds down.

The Federal Open Market Committee (FOMC) which conducts monetary policy is undergoing a major facelift. Although the appointment of Powell is viewed as replacing Yellen with “Yellen”, that is not the case. Mr. Powell has extensive financial market experience, something few FOMC members possess, which will help guide policy decisions. The Federal Reserve charter calls for governors that represent the business sector, but such appointments are rare, dominated instead by academic economists. Two other new appointees are less philosophically disposed to the notion of government running the economy (rather than markets). More positions will open in the near future and these will be filled with governors who place a different emphasis on the goal of creating inflation, an anathema to most small-business owners. The Federal Reserve will boost rates again in December, but that will leave the Federal Funds rate at about half of the level that history would suggest. The Federal Reserve is still in control of rates and bond investors bet on the Fed, not markets.

The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4% GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the 2009-16 weak recovery under President Obama. The change in the management team dramatically improved expectations. There is still much uncertainty about health care and taxes, but it appears that owners believe that whatever Congress finally comes up with will be an improvement, and so they remain positive.

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

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