Small business optimism ended the year historically strong, with a reading of 102.7, down 2 points from November. Seven of 10 components fell, two improved, and one was unchanged. An increased number of small business owners reported better business conditions and expect higher nominal sales in the next three months. While frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey’s 46-year history. Small businesses continued to hire and create new jobs with actual job creation matching November’s reading, the highest since May.

“December marked the end of another banner year for the small business economy, as owners took full advantage of strong consumer spending, and federal tax and regulatory relief,” said NFIB Chief Economist William Dunkelberg. “2020 is starting out with a solid foundation for continued growth, two-years into the Tax Cuts and Jobs Act that’s providing fuel to grow small businesses and their workforce.”

Although the NFIB Uncertainty Index rose 8 points in November to 80, owners expecting better business conditions increased 3 points to a net 16%. A net 9% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, 3 points above the average reading for 2019. The net percent of owners expecting higher real sales volumes increased 3 points to a net 16% of owners, bouncing back from November’s weak reading. Actual sales volumes are strong, and owners are a bit more certain of future sales growth.

The net percent of owners raising average selling prices rose 2 points to a net 14%, seasonally adjusted, continuing a measured upward trend since September. Unadjusted, 10% (up 2 points) reported lower average selling prices and 20% (up 3 points) reported higher average prices.

The current focus and noise in Washington, D.C. around impeachment is having little, if any, impact on small business owners, no different than during the Clinton impeachment proceedings. The Index showed little variation over the 1998-99 period that included the pre-impeachment news coverage, the impeachment proceedings, and its aftermath. The initial 2019 path is starting in a similar fashion, albeit at a stronger position.

As reported in last week’s NFIB’s monthly jobs report, a seasonally-adjusted net 19% plan to create new jobs, down 2 points. Finding qualified workers remains the top issue for small business owners, with 23% reporting this as their number one problem. A net 29 percent, seasonally adjusted, reported raising compensation (down 1 point) and a net 24% plan to do so in the coming months, down 2 points.

“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. ““What really matters to small business owners are issues directly impacting their bottom lines. Currently, their biggest problem is finding qualified labor, surpassing taxes or regulations,” said Dunkelberg. “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.”

LABOR MARKETS
Net job creation had faded from February’s 0.52 workers per firm to September’s 0.10, but is back in strong territory. Finding qualified workers remains the top issue for 23 percent reporting this as their number one problem, 4 points below August’s record high. Eleven percent (down 1 point) reported increasing employment an average of 2.0 workers per firm and 4 percent (down 1 point) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted). Fifty-three percent reported hiring or trying to hire (down 8 points), but 50 percent (94 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. Thirtythree percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 5 points.

Twenty-seven percent have openings for skilled workers (down 4 points) and 13 percent have openings for unskilled labor (down 2 points). Twenty-eight percent of owners reported few qualified applicants for their open positions (down 3 points) and 22 percent reported none (unchanged). Reports of “few or no qualified applicants” were very high in manufacturing (63 percent), construction (62 percent), and retail (55 percent). Labor shortages continue to slow economic growth in critical sectors like construction, manufacturing, and transportation.

CAPITAL SPENDING
Sixty-three percent reported capital outlays, up 3 points from November’s reading. Of those making expenditures, 43 percent reported spending on new equipment (up 1 point), 24 percent acquired vehicles (up 1 point), and 18 percent improved or expanded facilities (down 2 points). Seven percent acquired new buildings or land for expansion (unchanged), and 13 percent spent money for new fixtures and furniture (down 2 points). Twenty-eight percent plan capital outlays in the next few months, down 2 points.

SALES AND INVENTORIES
A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, 3 points above the average reading for 2019. The net percent of owners expecting higher real sales volumes increased 3 points to a net 16 percent of owners, bouncing back from November’s weak reading. Actual sales volumes are strong, and owners are a bit more certain of future sales growth.

The net percent of owners reporting inventory increases was unchanged at a net 2 percent. The net percent of owners viewing current inventory stocks as “too low” fell to a negative 4 percent, 5 point drop from November, suggesting that inventory stocks are more excessive now relative to sales growth. The net percent of owners planning to expand inventory holdings remained unchanged at a net 3 percent, a solid number. Overall, owners feel that the prospects for growth still justify adding to inventory stocks.

COMPENSATION AND EARNINGS
Attempting to fill open positions, historically high percentages of owners plan to raise worker compensation. Seasonally adjusted, a net 29 percent reported raising compensation (down 1 point) and a net 24 percent plan to do so in the coming months, down 2 points. The frequency of reports of positive profit trends fell 10 points to a net negative 8 percent reporting quarter on quarter profit improvements, reversing the strong gain in November. Softer earnings add more cost pressures (especially labor) raising the need to raise prices. Thirtyseven percent of those reporting weaker profits blamed weak sales, 22 percent blamed usual seasonal change, and 7 percent each cited material costs, labor costs, and price changes. For those reporting higher profits, 60 percent credited sales volumes. Twenty percent credited usual seasonal change.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and near a record low. Twenty-nine percent reported all credit needs met (up 1 point) and 56 percent said they were not interested in a loan. Three percent reported their last loan was harder to get than in previous attempts, unchanged and also near a record low. Two percent reported that financing was their top business problem (unchanged). The percent of owners reporting paying a higher rate on their most recent loan was 5 percent, up 1 point. Twenty-nine percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans fell another 20 basis points to 6.4 percent. Overall, credit markets have been very supportive of small business credit needs and will not likely become an impediment in the near future.

INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 14 percent, seasonally adjusted, continuing a measured upward trend since September. Unadjusted, 10 percent (up 2 points) reported lower average selling prices and 20 percent (up 3 points) reported higher average prices. Seasonally adjusted, a net 20 percent plan price hikes (down 2 points).

COMMENTARY
December marked the end of another strong year for the small business economy, adding to a historic run of elevated optimism among owners. 2020 is starting out with a solid foundation for continued growth. News coverage of a possible recession is muted and the Federal Reserve finally suspended its run of rate cuts. The USMCA agreement will soon find its way to the White House and the President is set to sign a phase one trade deal with China. But most importantly, Congress passed a significant tax addendum to the Tax Cuts and Jobs Act in December that repealed the dreaded Health Insurance Tax and the Cadillac tax, taxes that would have increased the cost of health insurance, further limiting the ability of small business owners to offer employee sponsored health insurance.

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. The Index showed little variation over the 1998-99 period that includes the preimpeachment news coverage, the impeachment proceedings, and its aftermath. The initial 2019 path is starting in similar fashion, albeit at a stronger position. What really matters to small business owners are the issues that directly impact their bottom line. And right now, the biggest problem is finding qualified labor to fill open positions for 23 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.

As we should be reminded often, expansions don’t die of old age (or by incessant news premonitions). They end because something bad happens, often by elected officials enacting bad policies that undermine the regular flow of commerce. Elected officials should be reminded of that often as we enter a new decade.