The small business half of the economy continued its remarkable economic streak, posting a 0.6 point gain in October’s Optimism Index. The 102.4 reading was buoyed by eight of the 10 Index components advancing, as talk of a recession waned in October. The Uncertainty Index declined 4 points but remains historically high heading into an election year.

“A continued focus on a recession by policymakers, talking heads, and the media clearly caused some consternation among small businesses in previous months, but after shifting their focus to other topics, it’s become clear that owners are not experiencing the predicted turmoil,” said NFIB President and CEO Juanita D. Duggan. “Small business owners are continuing to create jobs, raise wages, and grow their businesses, thanks to tax cuts and deregulation, and nothing is stopping them except for finding qualified workers.”

Key findings from October’s index included:
- The October increase was led by GDP-producing plans for job creation, inventory investment, and capital spending.
- Reports of actual capital spending increased and inventory investment improved from a modest negative level in September.
- Reports of rising labor compensation increased and remained strong historically, and the frequency of plans to raise compensation also rose in October.
- Reports of higher selling prices remained subdued, so rising labor costs are still not pushing up inflation on Main Street.
- Actual job creation in October exceeded that in September, as small businesses continued to hire and create new jobs.

The reported increase in sales put pressure on inventory stocks, reducing them. Owners reporting inventory increases remained unchanged at a net 0 percent. The net percent of owners planning to expand inventory holdings increased 3 points to a net 5 percent, a solid number and one of the best in a year. Overall, owners feel that the prospects for growth justify adding to inventory stocks.

Fifty-nine percent reported capital outlays, up 2 points from September’s reading. Of those making expenditures, 40 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 1 point), and 18 percent improved or expanded facilities (up 4 points). Seven percent acquired new buildings or land for expansion (unchanged) and 14 percent spent money for new fixtures and furniture (unchanged).

Twenty-nine percent plan capital outlays in the next few months, up 2 points. Plans to invest were strong in agriculture and the wholesale trades (34 percent each), and manufacturing and transportation (33 percent each). Thirty percent of small firms reported negative effects from trade policy. Making major commitments about production and distribution will be more difficult until import and export prices are stabilized with trade agreements.

“Labor shortages are impacting investment adversely – a new truck, or tractor, or crane is of no value if operators cannot be hired to operate them,” said NFIB Chief Economist William Dunkelberg. “The economy will likely remain steady at its current level of activity for the next 12 months as Congress will be focused on other matters, and an election cycle will limit action. Any significant change in trade issues will impact financial markets more than the real economy during this period. Adjustments to a new set of ‘prices,’ such as tariffs, will take time.”

Twenty-five percent of the owners selected “finding qualified labor” as their top business problem, more than cited taxes or regulations. Reports of higher worker compensation rose 1 point to a net 30 percent of all firms – a historically high reading. Plans to raise compensation rose 4 points to a net 22 percent. Firms are likely to continue to offer improved compensation to attract and retain qualified workers because the only solution in the short term to an employee shortage is to raise compensation to attract new workers and to train less qualified employees. Owners are still not passing on higher compensation costs, with only 10 percent reporting higher selling prices.

“The economy is doing well given the labor constraints it faces. Unemployment is very low, incomes are rising, and inflation is low. That’s a good economy,” Dunkelberg concluded.

LABOR MARKETS
Job creation held steady in October, with an average addition of 0.12 workers per firm. Net job creation has faded since February from 0.52 workers per firm to 0.12, no surprise as reports that “finding qualified workers” to fill job openings has been the number one business problem this year. Finding qualified workers remains a top issue with 25 percent reporting this as their number one problem, 2 points below August’s record high.

Sixty percent reported hiring or trying to hire (up 3 points), 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. Main Street continues to create new jobs, pushing the economy forward. However, the high level of unfilled job openings and plans to create new jobs make it clear that the unavailability of qualified labor for all types of jobs is impeding economic growth.

CAPITAL SPENDING
Fifty-nine percent reported capital outlays, up 2 points from September’s reading. Of those making expenditures, 40 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 1 point), and 18 percent improved or expanded facilities (up 4 points). Seven percent acquired new buildings or land for expansion (unchanged), and 14 percent spent money for new fixtures and furniture (unchanged). Trade policy is impacting many small firms adversely; about 30 percent recently reported negative impacts. Making commitments about production and distribution will be more difficult until import and export prices are stabilized with trade agreements.

SALES AND INVENTORIES
A net 4 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 2 points. The net percent of owners expecting higher real sales volumes rose 1 point to a net 17 percent of owners. Actual sales volumes have been steady, but there is significant uncertainty about the future; especially with the Fed cutting interest rates, the news preoccupied with a recession, and the political chaos in Washington, D.C.

The net percent of owners reporting inventory increases was unchanged at a net 0 percent, suggesting that the reported increase in sales put pressure on inventory stocks, reducing them.

INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 10 percent, seasonally adjusted. Unadjusted, 10 percent (down 3 points) reported lower average selling prices and 18 percent (down 2 points) reported higher average prices. Price hikes were most frequent in the retail trades (7 percent lower, 24 higher), and construction (6 percent lower, 23 higher). Seasonally adjusted, a net 21 percent plan price hikes (up 6 points). While only 3 percent plan to cut selling prices, 10 percent reported cuts in October, suggesting that most price cutting is an unanticipated, unplanned response to market conditions –a healthy process. On balance, inflationary pressures are weak on Main Street as confirmed by government inflation reports.

COMPENSATION AND EARNINGS
Reports of higher worker compensation rose 1 point to a net 30 percent of all firms. Plans to raise compensation rose 4 points to a net 22 percent. Firms are likely to continue to offer improved compensation to attract and retain qualified workers because it is the only solution in the short term to attract new workers. This creates job vacancies in other firms unless the labor force is growing as it did in October. If vacancies begin to evaporate, it will be an early sign that business is weakening.

The frequency of reports of positive profit trends fell 5 points to a net negative 8 percent reporting quarter on quarter profit improvements. Thirty-five percent of those reporting weaker profits blamed weak sales (up 6 points), 12 percent blamed labor costs (down 1 point), and 12 percent cited lower selling prices (up 4 points). For those reporting higher profits, 43 percent credited sales volumes (down 9 points). Ten percent credited higher selling prices (up 6 points).

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, up 1 point and near a record low. Twenty-nine percent reported all credit needs met (down 1 point) and 55 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. One percent reported that financing was their top business problem (down 1 point), a record low. 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.

COMMENTARY
The economy continues to grow around a 2 percent pace. This appears to be a concern for some policy makers, even though the economy is still growing slightly faster than “potential” according to government statistics. Labor shortages are slowing growth significantly in critical sectors like construction, manufacturing, transportation, and wholesale trades. Fed policies to stimulate growth cannot overcome the fact that labor is not available to support more of it. And labor shortages also impact business investment adversely –a new truck, or tractor, or crane is of no value if operators cannot be hired to operate them. The economy is doing well given the labor constraints it faces. Unemployment is very low, incomes are rising, and inflation is low – that’s a good economy.

Fed interest rate cuts have produced the new record high valuations for stocks and bonds that Wall Street wanted. However, the “fundamentals” such as sales and profit growth are not keeping pace with those valuations, making the market vulnerable to substantial fluctuations. The stock market is not the real economy. The Fed hopes that the rate cuts will (1) raise the inflation rate, (2) stimulate investment spending, (3) produce faster growth, and (4) raise consumer spending because they are “wealthier.” But why do they want to raise our cost of living faster? Or, signal concern about a weaker economy and not a good time to invest? Or, grow faster with a shortage of workers which interest rate cuts do not help? Most consumers do not own enough stocks or bonds to have their spending impacted by a stronger stock market, and Fed cuts reduce interest income for tens of millions of consumers. Businesses and consumers only borrow if they have a good use for the money, a good place to invest the money, and the expected income stream to support debt payments. All the “recession” talk, and the Fed’s cautions are not conducive to creating a positive environment for investing in the future.

The economy will be steady at its current level of activity for the next 12 months. Congress will be focused on other matters, and there is usually inaction in Presidential election years. Any significant change in of trade issues will impact financial markets more than the real economy during this period. Adjustments to a new set of “prices” (tariffs, etc.) take time.

On Main Street, small business owners are mostly focused on business, which is good. Labor shortages handicap firms in every industry, but especially in manufacturing and construction. Rising labor costs are becoming a bit more of a problem, but have not yet triggered the surge in price hikes that the Fed has been hoping to see for years now. Authorized government spending has started to contribute more to growth and will continue to in 2020. Consumer sentiment has held up well in spite of the political chaos in Washington D.C. as has consumer spending (lots of jobs). Only a major unexpected disruptive event can dent the economy in the near term.