Small business optimism posted the largest month-over-month gain since May 2018, rising 2.3 points to 104.7 in November. The exceptional Optimism Index reading was bolstered by seven of the 10 Index components advancing, led by a 10-point improvement in earnings. Owners reporting it is a good time to expand increased by 6 points and those expecting better business conditions increased by 3 points. The NFIB Uncertainty Index fell 6 points in November to 72, adding to the 4-point drop in October and the lowest reading since May 2018.
“This historic run may defy the expectations of many, but it comes as no surprise to small business owners who understand what a supportive tax and regulatory environment can do for their companies,” said NFIB Chief Economist William Dunkelberg. “As the two-year anniversary of the Tax Cuts and Jobs Act’s passage approaches this month, small businesses, the world’s third largest economy, are using those savings to power the American economy.”
Earnings, or the frequency that owners report positive profit trends, rose 10 points, 1 point below the record set in May 2018, to a net 2 percent reporting quarter on quarter profit improvements. Stronger profits negated some cost pressures (especially labor) limiting the need to raise prices. A net 12 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 8 points and the highest level since May 2018.
“Owners are aggressively moving forward with their business plans, proving that when they’re given relief from the government, they put their money where their mouth is, and they invest, hire, and increase wages,“ said NFIB Chief Economist William Dunkelberg. “Owners are most closely focused on issues that directly impact their business, including the real, significant tax relief they were given two years ago, and they’re anxious to see that relief made permanent.”
As reported last week in NFIB’s monthly jobs report, a net 30 percent of small business owners, seasonally adjusted, reported raising compensation (unchanged) and 26 percent plan to do so in the coming months, up 4 points and the highest level since December 1989. Job creation jumped in November, with an average addition of 0.29 workers per firm, the highest level since May. Finding qualified workers though remains the top issue for 26 percent reporting this as their number one problem, 1 point below August’s record high.
Owners raising average selling prices rose 2 points to a net 12 percent, seasonally adjusted. Price hikes were most frequent in the retail trades (7 percent lower, 24 higher) and construction (6 percent lower, 23 higher). On balance, inflationary pressures are weak on Main Street as confirmed by government inflation reports.
November reflects a stark departure from previous months of clatter months about a possible recession that dampened owners’ economic outlook. But the current focus and noise in Washington, D.C. around impeachment is proving to have little, if any, impact on small business owners, no different than during the impeachment proceedings of President Bill Clinton.
LABOR MARKETS
Job creation jumped in November, with an average addition of 0.29 workers per firm, the highest level since May. Net job creation had faded from February’s 0.52 workers per firm to September’s 0.10. November’s strong course reversal is a positive sign in filling more open positions. Finding qualified workers though remains the top issue for 26 percent reporting this as their number one problem, 1 point below August’s record high. Twelve percent (up 1 point) reported increasing employment an average of 2.7 workers per firm and 3 percent (down 4 points) reported reducing employment an average of 1.7 workers per firm (seasonally adjusted). Sixty-one percent reported hiring or trying to hire (up 1 point), but 53 percent (88 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. Thirty-eight percent of all owners reported job openings they could not fill in the current period, up 4 points and 1 point below the record high last reached in July.
A seasonally-adjusted net 21 percent plan to create new jobs, up 3 points. Not seasonally adjusted, 19 percent plan to increase total employment at their firm (up 1 point), and 5 percent plan reductions (down 1 point). Thirty-one percent have openings for skilled workers (up 1 point) and 15 percent have openings for unskilled labor (up 2 points).
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CAPITAL SPENDING
Sixty percent reported capital outlays, up 1 point from October’s reading. Of those making expenditures, 42 percent reported spending on new equipment (up 2 points), 23 percent acquired vehicles (down 1 point), and 20 percent improved or expanded facilities (up 2 points). Thirty percent plan capital outlays in the next few months, up 1 point. Trade policy is impacting many small firms adversely; about 32 percent recently reported negative impacts, nearly unchanged from earlier this year. Making major commitments about production and distribution will be more difficult until import and export prices are stabilized with trade agreements.
SALES AND INVENTORIES
A net 12 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 8 points and the highest level since May 2018. The net percent of owners expecting higher real sales volumes fell 4 points to a net 13 percent of owners, the lowest reading since November 2016. Actual sales volumes are strong, but owners are less certain of future sales growth. The net percent of owners reporting inventory increases rose 2 points to a net 2 percent, responding to reported increase in sales. The contribution of inventory investment to GDP growth in the fourth quarter is likely to rise as owners build up stocks. The net percent of owners viewing current inventory stocks as “too low” rose to 1 percent, a gain of 5 points, suggesting that inventory stocks are less excessive now relative to sales growth. The net percent of owners planning to expand inventory holdings fell 2 points to a net 3 percent, a solid number. Overall, owners feel that the prospects for growth still justify adding to inventory stocks.
COMPENSATION AND EARNINGS
Seasonally adjusted, 30 percent reported raising compensation (unchanged) and 26 percent plan to do so in the coming months, up 4 points and the highest level since December 1989. Ten percent cited labor costs as their top problem, 1 point below the record high level reached in September. In retail, 18 percent report labor costs as their main issue, a record high for this industry. Retailers are facing compensation pressures due to labor shortages, but also higher minimum wage laws passed in many parts the country and wage competition with large firms. Retail owners are still not passing on higher compensation costs, with only a net 13 percent (not seasonally adjusted) reporting higher selling prices.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and near a record low. Twenty-eight percent reported all credit needs met (down 1 point) and 58 percent said they were not interested in a loan. Three percent reported their last loan was harder to get than in previous attempts, also near a record low. Two percent reported that financing was their top business problem (up 1 point). The Fed’s most recent interest rate cut will lower borrowing costs but at these low levels, the rate cut will make many banks less willing to make longer term loans, fearing that interest rates will rise in the future and eliminate the profitability of those loans.
INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 12 percent, seasonally adjusted. Unadjusted, 8 percent (down 2 points) reported lower average selling prices and 17 percent (up 1 point) reported higher average prices. Seasonally adjusted, a net 22 percent plan price hikes (up 2 points). While only 1 percent plan to cut selling prices, 8 percent reported cuts in November, suggesting that most price cutting is an unanticipated, unplanned response to market conditions – a healthy process.
COMMENTARY
The small business economy continues to defy expectations in its historic run of strong optimism. This historic run is no surprise though to small business owners who understand it is due to a supportive environment from which to operate. As we near the two-year anniversary of the Tax Cuts and Jobs Act, which includes the Small Business Deduction, owners continue to hire, raise wages, and invest in their business.
The current focus and noise in Washington, D.C. around impeachment has little if any impact on small business owners, no different than 21 years ago during the Clinton impeachment proceedings. Looking at the Index, it showed little variation over the 1998-99 period that includes the pre-impeachment news coverage, the impeachment proceedings, and its aftermath. The initial 2019 path is starting in similar fashion, albeit at a stronger position. So far, it appears there is little to no indication that the impeachment proceedings are having much, if any, economic impact.
November reflects a stark departure from the previous clatter months earlier about a possible recession that dampened owners’ economic outlook. The constant drumbeat of news reporting on the topic generated some concern among small business owners reflected in September’s drop in optimism. But as in the late 90s, a strong economy appears to prevail political disruptions when there is little effect on policies impacting the economy or small business sector.
What really matters to small business owners are the issues that directly impact their business. And right now, the biggest problem is finding qualified labor to fill open positions for 26 percent of owners, far more than those citing taxes or regulations. Two years ago, Congress and the President provided real, significant tax relief to small business owners. Now owners are anxious to have their tax cuts made permanent, so Congress needs to get back to work.