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NFIB Small Business Optimism Index lost 2.6 points to 104.9 in December
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The Index of Small Business Optimism lost 2.6 points in December, falling to 104.9, still one of the strongest readings in the 45-year history of the NFIB surveys. The highest reading of 108.0 was reached in July 1983, only slightly above November’s 107.5. The lowest reading of 79.7 occurred in April 1980. Two of the 10 Index components posted a gain, five declined, and three were unchanged. The decline left the Index historically strong and maintained a string of exceptional readings that started the day after the 2016 election results were announced. Following the election announcement, the Index rose from 95.0 (a below average reading) for October and pre-election November, to 102.0 in the November weeks after the election, and then to 105.0 in January. This surge in optimism has led to 2017 achieving the highest yearly average Index reading in the survey’s history. The average monthly Index for 2017 was 104.8. The previous record was 104.6, set in 2004.
LABOR MARKETS
Job creation was slow in the small-business sector as owners reported a seasonally adjusted average employment change per firm of 0.01 workers. Clearly, a lack of “qualified” workers is impeding the growth in employment. Thirteen percent (unchanged) reported increasing employment an average of 2.0 workers per firm and 10 percent (unchanged) reported reducing employment an average of 4.1 workers per firm (seasonally adjusted). Fifty-nine percent reported hiring or trying to hire (up 7 points), but 54 percent (92 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill, a record high. Nineteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), second only to taxes. This is the top ranked problem for those in construction (30 percent) and manufacturing (27 percent). Thirty-one percent of all owners reported job openings they could not fill in the current period, up 1 point from November. Twelve percent reported using temporary workers, up 1 point. A seasonally adjusted net 20 percent plan to create new jobs, down 4 points from a record high reading and the second highest reading since October 1999.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically low. Thirty-two percent reported all credit needs met (unchanged) and 52 percent said they were not interested in a loan, up 4 points. Only 1 percent reported that financing was their top business problem compared to 21 percent citing taxes. Three percent reported loans “harder to get’, down 1 point at historic lows. Thirty-four percent of all owners reported borrowing on a regular basis (up 4 points). The average rate paid on short maturity loans was up 40 basis points at 6.1 percent after the Federal Reserve raised rates.
SALES AND INVENTORIES
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 9 percent, a 14-point improvement from November. Tentative customers in November became aggressive spenders across the board in December, closing out the year with very strong reports of sales gains, the best levels since 2006. After a strong surge in November, the net percent of owners expecting higher real sales volumes fell 6 points, falling to a net 28 percent of owners, still one of the best readings since 2007. The net percent of owners reporting inventory increases was unchanged at a net negative 2 percent (seasonally adjusted). Strong sales resulted in a drawdown in inventories, setting the stage for additional inventory investment in 2018. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 2 percent, a positive view of current stocks. The net percent of owners planning to add to inventory fell 8 points to a net negative 1 percent, reversing surprisingly strong November investment plans.
COMPENSATION AND EARNINGS
Reports of higher worker compensation were unchanged at a net 27 percent, historically very strong all last year. Tight labor markets are historically associated with high percentages of owners raising worker compensation. Owners complain at record rates of labor quality issues, with 92 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Nineteen percent selected “finding qualified labor” as their top business problem, far more than cited weak sales or the cost of regulations as their top challenge. Plans to raise compensation jumped 6 points in frequency to a net 23 percent in response to tighter labor markets. The frequency of reports of positive profit trends fell 3 points to a net negative 15 percent reporting quarter on quarter profit improvements, a solid reading historically but not exceptional.
CAPITAL SPENDING
Sixty-one percent reported capital outlays, up 2 points. This anticipates a substantial increase in capital spending. Of those making expenditures, 43 percent reported spending on new equipment (up 3 points), 23 percent acquired vehicles (down 6 points), and 16 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (unchanged) and 15 percent spent money for new fixtures and furniture (up 2 points). Twenty-seven percent plan capital outlays in the next few months, up 1 point from November.
INFLATION
The net percent of owners raising average selling prices fell 2 points to a net 8 percent seasonally adjusted, ending a steady but modest uptrend in the frequency of reported price increases. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped. Seasonally adjusted, a net 23 percent plan price hikes (up 1 point), although far fewer will report actually doing so in the following months.
COMMENTARY
The Tax Cuts and Jobs Act was signed into law by the President on December 22, 2017. Compared to the Reagan cuts, this law is more heavily weighted toward “business” because the marginal tax rates for individuals were already quite low compared to pre-1986. More significantly though, the new law recognizes the importance of tax cuts for “pass through” businesses, most of which are small businesses.
The tax bill has its opponent who claim that the bill is “regressive”, assuming little or no economic growth (which drives tax revenues) and no employment benefits (more jobs and higher wages). But despite the critics, the U.S. economy is on track to have 12 months of growth in excess of 3 percent by the end of the first quarter of 2018.
The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4 percent for the fourth quarter of 2017. This is a dramatically different picture than owners presented during the 2009-16 recovery under President Obama. The change in the management team in Washington dramatically improved expectations, and that began to translate into increased sales and hiring. Owners did not know exactly what the tax bill would look like, but believed that whatever it looked like, it would be a significant improvement over what was currently in force. That was enough to “bet on”.
As proof, the stock market was up $7 trillion last year, over two million new jobs were created, capital spending lifted off (good for productivity), and housing is running at full tilt. All of this started as soon as the new management team in Washington was elected. Small business owners had it right, their optimism (and subsequent sales and hiring) rose the day after the election results were announced. By the second quarter, 3 percent growth had been restored as the small business sector (and others) shook off the shackles of pessimism as the new government began eliminating the impediments to growth put in place by the prior administration. The private sector can make good things happen once the heavy hand of government management of the economy is lifted.
Posted: January 9, 2018 Tuesday 07:00 AM