NFIB Report October 2017: Small business optimism maintain lofty level

Bill Dunkelberg

NFIB optimism index inches up in October as more owners expect better sales and say it’s a good time to expand.

More small business owners last month said they expect higher sales and think that now is a good time to expand, according to the October NFIB Index of Small Business Optimism, released today.

“Owners became much more positive about the economic environment last month, which suggests a longer-run view,” said NFIB Chief Economist Bill Dunkelberg. “In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year.”

The October Index rose to 103.8, up from 103 the previous month. The historically strong performance extends the streak of positive months dating back to last November, when it shot up immediately following the election.

Four of the Index components rose last month. Five declined slightly, while one remained unchanged. Outlook for expansion and sales expectations each jumped six points, while job openings increased by five points.

The tight labor market got tighter for small business owners last month, continuing a year-long trend. Fifty-nine percent of owners said they tried to hire in October, with 88% of them reporting no or few qualified applicants. Hiring activity was particularly high in Florida and Georgia, as construction firms are still trying to meet higher demand caused by the recent hurricane.

“Consumer sentiment surged based on optimism about jobs and incomes, an encouraging development as consumers account for 70% of GDP,” said Dunkelberg. “We expect a pickup in auto spending as people in Texas and Florida continue to replace cars that were damaged in the hurricanes. We expect the same increase in home improvement spending, partly because of the hurricanes, but also because of the skyrocketing price of homes.”


Job creation strengthened in the small-business sector as business owners reported a seasonally adjusted average employment change per firm of 0.17 workers. Fourteen percent (up 2 points) reported increasing employment an average of 3.5 workers per firm and 11% (down 2 points) reported reducing employment an average of 2.2 workers per firm (seasonally adjusted). Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points, the highest reading since November 2001. Fifty-nine percent reported hiring or trying to hire (up 2 points), but 52% (88% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), second only to taxes and the highest reading since 2000. This is the top ranked problem for those in construction (31%) and manufacturing (27%). A seasonally adjusted net 18% plan to create new jobs, down 1 point from September’s strong reading.


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%, unchanged from September. Consumer spending slowed at the end of the third quarter and hurricanes definitely depressed shopping in large parts of the country. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 6 points, rising to a net 21% of owners, after a 12-point drop in September. What triggered September’s large decline in expectations is less clear, as reports on the economy were fairly good.

The net percent of owners reporting inventory increases rose 2 points to a net 0% (seasonally adjusted). Inventory building did occur for the economy as a whole, but in the form of reduced rates of depletion in the small business sector. The net percent of owners viewing current inventory stocks as “too low” lost 2 points to a net -5%, a less positive view of the need for current stocks. This is a bit surprising in light of the rather positive view of real sales trends in the next 3 months. The net percent of owners planning to add to inventory fell 3 points to a net 4%, a solid figure that is supportive of fourth quarter growth.


Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 41% reported spending on new equipment (up 2 points), 24% acquired vehicles (up 1 point), and 16% improved or expanded facilities (up 3 points). Seven percent acquired new buildings or land for expansion (up 1 point) and 12% spent money for new fixtures and furniture (unchanged). The percent of owners planning capital outlays was unchanged at 27%. The recovery from the hurricanes will undoubtedly raise these numbers.


The net percent of owners raising average selling prices rose 2 points to a net 8%. 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 (unchanged), and 16% reported price increases (up 1 point), illustrative of the dynamics of price adjustments in the private sector to changes in economic conditions and demand. Seasonally adjusted, a net 22% plan price hikes, although far fewer will report actually doing so in the following months.


Reports of higher worker compensation rose 2 points to a net 27%, historically strong. Owners complain at record rates of labor quality issues, with 88% of those hiring or trying to hire reporting few or no qualified applicants for their open positions. A near-record 20% selected “finding qualified labor” as their top business problem. Plans to raise compensation rose 3 points in frequency to a net 21%, following a 3-point rise in September. Gains in compensation are to be expected when labor markets are very tight as they appear to be.


Four percent of owners reported that all their borrowing needs were not satisfied, up 2 points and historically low. Twenty-nine percent reported all credit needs met (down 4 points) and 53 % said they were not interested in a loan, up 2 points. Only 2% reported that financing was their top business problem compared to 21% citing taxes, 14% citing regulations and red tape, and 20% the availability of qualified labor. Thirty 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 6.0%, little changed even as the Federal Reserve has been raising rates.



The preliminary estimate of third quarter growth came in at 3%, but this figure will be revised several times before the “official” figure is reported. It was virtually unchanged from the 3.1% growth for the second quarter. Domestic spending was weaker, closer to a 2% rate of growth. Residential investment spending faltered a bit, perhaps due to supply constraints, such as shortage of labor, not weaker demand. Consumer sentiment surged based on optimism about jobs and incomes, an encouraging development as consumers account for 70% of GDP. There will be a pickup in auto spending (replacing hurricane-damaged cars) and home improvement spending, due to hurricane damage, and the rising prices of houses due to a shortage of new supply.

The Federal Reserve will boost rates again in December, by 25 basis points, putting the policy range at 1.25-1.5% for Federal Funds. But that will leave the rate at about half of the level that history would suggest. It will also stop reinvesting $10 billion of maturity proceeds each month, gradually increasing this to $50 billion per month. The Federal Reserve has not signaled how much lower it will take its $4.5 trillion portfolio, but the reduction will be slow. Less Federal Reserve buying, however, will put some upward pressure on interest rates. The Federal Reserve is still in control of rates and bond investors will bet on the Federal Reserve, not markets. New Federal Reserve management will soon be in place and it will like set a less cautious path for “normalization.”

Congress has taken its first cut at tax reform and small business owners are eagerly waiting to see how the developing legislation will benefit them. Historically, Congress has given inadequate consideration of the impact of their laws on small firms, paying more attention to lobbies from the largest firms and unwittingly saddling small firms with costly and inappropriate (of little or no value to society) regulations promulgated for large firms. Owners remain hopeful that whatever the final tax legislation looks like, it will be a positive change from current law.

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

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