Optimism among small business owners continued its steady climb in April, with the NFIB Small Business Optimism Index increasing 1.7 points to 103.5. Sales improved in April, the inventory soft spot seen in last month’s report rebounded, and profit trends posted a very solid advance. Job creation plans gained, hiring remained strong, and expectations for sales, business conditions, and credit conditions all improved.

“America’s small and independent businesses are rebounding from the first quarter ‘shut down, slow down’ and don’t appear to be looking back. April’s Index is further evidence that when certainty and stability increase, so do optimism and action,” said NFIB President and CEO Juanita D. Duggan. “The continued economic boom is thanks, in a major way, to strong growth in the small business half of the economy.”

A net nine percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, a four-point improvement, and the net percent of owners expecting higher real sales volumes rose one point to a net 20 percent of owners. The net percent of owners reporting inventory increases fell three points to a net two percent (seasonally adjusted). This is consistent with the significant build up in the first quarter that added nearly one point to GDP growth, and owners slowed additions to wait and see how much customers reduced the excess stock. The net percent of owners viewing current inventory stocks as “too low” improved two points to a net negative four percent as fewer owners viewed stocks as excessive. The net percent of owners planning to expand inventory holdings rose from a negative one percent to two percent, a three-point gain, indicating that strong sales gains resolved the excessive Q1 inventory build and owners are ready to place new orders and build inventory.

“The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs were created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated, and consumers and small businesses are an important part of the improvement in sales,” said NFIB’s Chief Economist Bill Dunkelberg.

The frequency of reports of positive profit trends improved five points to a net negative three percent reporting quarter on quarter profit improvements, a very solid gain. Twenty-seven percent plan capital outlays in the next few months, unchanged. While investment spending has been solid for the past two years, more will be needed to make up for the years of weak investment spending starting in 2008. From the start of the recovery in Q3 2009 through 2016, the average percent reporting capital outlays was 54 percent and was as low as 44 percent (September, November, December 2009 and August 2010). After 2016, the average has been 60 percent, with a high of 66 percent reached in February 2018. Recent productivity numbers suggest that the revival in small business investment has started to pay off with gains in worker productivity.

As reported in the April NFIB Jobs Report, 24 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, one point below the record high. Fifty-seven percent reported hiring or trying to hire (down three points), but 86 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, down one point from the record high. Overall, reports of rising compensation are holding at historically high levels, with reports of higher worker compensation rising one point to a net 34 percent of all firms. Plans to raise compensation were unchanged at a net 20 percent.

Owners expecting better business conditions increased two points to a net 13 percent and those expecting easier credit conditions increased three points. Four percent of owners reported that all their borrowing needs were not satisfied, up one point and historically very low. Two percent reported that financing was their top business problem (up one point) compared to 24 percent citing the availability of qualified labor, 16 percent citing taxes, and 15 percent citing regulations and red tape.

LABOR MARKETS
More new jobs were created in April, although at a slower pace than in the last quarter, with a net addition of 0.32 workers per firm. Twelve percent (unchanged) reported increasing employment an average of 3.0 workers per firm and 5 percent (up 4 points) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). Fifty-seven percent reported hiring or trying to hire (down 3 points), but 49 percent (86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill, down 5 points. Twenty-four percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, 1 point below the record high. Thirty-eight percent of all owners reported job openings they could not fill in the current period, down 1 point from the record high. Thirteen percent reported using temporary workers (up 1 point). A seasonally-adjusted net 20 percent plan to create new jobs, up 2 points. Thirty-two percent have openings for skilled workers (down 1 point) and 15 percent have openings for unskilled labor (up 1 point). Thirty-one percent of owners reported few qualified applicants for their open positions (down 3 points) and 18 percent reported none (down 2 points). Sixty-nine percent in transportation reported few or no qualified applicants, 92 percent of those hiring or trying to hire.

SALES AND INVENTORIES
A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, a 4-point improvement, rebounding from the “shut down, slow down” in the first quarter. Consumer optimism has also bounced back according to the University of Michigan’s Consumer Sentiment survey. The net percent of owners expecting higher real sales volumes rose 1 point to a net 20 percent of owners. For perspective, in the 12 months before the 2016 election results, the average was a net 2 percent, 18 points worse.

The net percent of owners reporting inventory increases fell 3 points to a net 2 percent (seasonally adjusted), consistent with the significant build up in the first quarter that added nearly 1 point to GDP growth. The net percent of owners viewing current inventory stocks as “too low” improved 2 points to a net negative 4 percent. The net percent of owners planning to expand inventory holdings rose from a negative 1 percent to 2 percent, a 3-point gain.

CAPITAL SPENDING
Fifty-eight percent reported capital outlays, down 2 points. Of those making expenditures, 41 percent reported spending on new equipment (down 3 points), 26 percent acquired vehicles (down 3 points), and 16 percent improved or expanded facilities (down 1 point). Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (down 3 points). Twenty-seven percent plan capital outlays in the next few months, unchanged. From the start of the recovery in Q3 2009 through 2016, the average percent reporting capital outlays was 54 percent and was as low as 44 percent (September, November, December 2009 and August 2010). After 2016, the average has been 60 percent, with a high of 66 percent reached in February 2018.

INFLATION
The net percent of owners raising average selling prices rose 1 point to a net 13 percent, seasonally adjusted. Unadjusted, 11 percent (up 1 point) reported lower average selling prices and 24 percent (down 3 points) reported higher average prices. Firms in finance, insurance, and real estate most frequently reported raising their average prices (33 percent), followed by the wholesale trades (28 percent), construction (25 percent), and manufacturing (25 percent). Seasonally adjusted, a net 21 percent plan price hikes (down 3 points after a 2 point decline in March).

COMPENSATION AND EARNINGS
Reports of higher worker compensation rose 1 point to a net 34 percent of all firms. Plans to raise compensation were unchanged at a net 20 percent. Overall, reports of rising compensation are holding at historically high levels. Twenty-four percent (up 3 points) selected “finding qualified labor” as their top business problem. The frequency of reports of positive profit trends improved 5 points to a net negative 3 percent reporting quarter on quarter profit improvements, a very solid gain. Thirty-two percent of those reporting weaker profits blamed sales, 8 percent blamed labor costs, and 10 percent cited lower selling prices. For those reporting higher profits, 56 percent credited sales volumes, and seven percent credited higher prices.

CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point and historically very low. Thirty-two percent reported all credit needs met (down 1 point) and 51 percent said they were not interested in a loan, unchanged. Four percent reported their last loan was harder to get than the previous one, down 2 points and historically low. Two percent reported that financing was their top business problem (up 1 point). The percent of owners reporting paying a higher rate on their most recent loan was down 4 points to 13 percent. Thirty-one percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans rose 60 basis points to 6.7 percent.

COMMENTARY
The strength in hiring plans and the record-high levels of job openings is a positive indicator for economic growth. We are at full employment and labor supply is a headwind to growth. Hiring a worker is an investment, involving training time and substantial training costs, which raise worker productivity but uses valuable firm resources, cash, and time. The wide-spread willingness of owners to increase employment indicates that they see an economy that will be solid enough to deliver a return on their investment in labor as well as new capital. The first quarter GDP reading was very solid at 3.2 percent, although 0.7 percent of that was from inventory accumulation and another 0.4 percent due to lower imports. Consumer spending was soft, and if it doesn’t pick up in the second quarter, last quarter’s inventory build will be a negative for GDP growth. However, early reports on sales trends from NFIB members in April suggest that demand will remain solid for the second quarter. The “real” economy is doing very well; lots of jobs and GDP were being produced with no substantive pressure on prices. Investment spending has been in a solid zone, and productivity numbers suggest that we are beginning to reverse the negative effects of the huge decline in investment spending from 2009-2016. Labor compensation is steadily growing around a 3 percent rate, while prices are increasing much more slowly.

Financial markets, however, are displaying a lot of volatility, responding to “rumors” about the Federal Reserve and more tariffs. This volatility creates a lot of noise in analyzing U.S. economy but is disconnected from the strong small business sector. An increase of one-quarter point in interest rates would have little impact on investment plans on Main Street, but would likely throw the bond and stock markets into turmoil. A one-quarter point cut in rates would have little impact on Main Street investment decisions but would likely send bond and stock prices even further into record, and uncharted, “over-valued” territory. Rising asset prices do not increase the amount of real output available to be purchased. Twenty years ago, consumers held about $3.50 in net worth purchasing power per dollar of output. Today, that figure is around $6. In simple terms, if we liquidated our assets to buy real output, we would find out that our net worth dollars wouldn’t and couldn’t buy as much real output of goods and services as we hoped. The “inflation” that many feared from quantitative easing did not appear in the real economy, it occurred in financial markets.