Small business owners expressed slightly higher levels of optimism in February with the NFIB Optimism Index moving up 0.2 points to 104.5, a reading among the top 10 percent in the 46-year history of the survey. Those expecting better business conditions increased and job creation and openings improved as well. Real sales expectations declined along with capital expenditure and inventory plans.

“The small business economic expansion continued its historic run in February, as owners remained focused on growing their businesses in this supportive tax and regulatory environment,” said NFIB Chief Economist William Dunkelberg. “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”

Reports of better business conditions in the next six months improved 8 points, to a net 22 percent, according to the survey. The NFIB Uncertainty Index fell one point in February to 80. Those who say it is a good time to expand dipped 2 points to 26 percent.

The net percent of owners raising average selling prices fell 4 points to a net 11 percent, seasonally adjusted. A net 5 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from January. The levels of owners expecting higher real sales volumes declined 4 points to a net 19 percent of owners.

Small business owners continue to indicate their credit needs are being met with little trouble borrowing. Thirty-two percent reported all credit needs met (up 2 points), and 55 percent said they were not interested in a loan (up 1 point). Two percent of owners reported that all their borrowing needs were not satisfied, down 1 point, matching the record low.

Sixty-two percent reported capital outlays, down 1 point from January’s reading, while 26 percent plan capital outlays in the next few months, down 2 points from January. The net percent of owners reporting inventory increases rose 1 point from January’s reading to a net 7 percent, and the net percent of owners planning to expand inventory holdings decreased from January by 2 points to a net 2 percent, a solid number.

As reported in last week’s NFIB’s monthly jobs report, small business owners added an average of 0.43 workers per firm, but finding qualified workers remained the top issue with 25 percent reporting this as their number one problem, 2 points below August’s record high. Twenty-five percent of the owners selected “finding qualified labor” as their top business problem, far more than those citing either taxes or regulations.

Historically high percentages of owners plan to raise worker compensation. Seasonally adjusted, a net 36 percent reported raising compensation (unchanged) and a net 19 percent plan to do so in the coming months, down 5 points from January. Eight percent cited labor costs as their top problem.

“Firms will likely continue offering improved compensation to attract and retain qualified workers as the labor market remains highly competitive,” said Dunkelberg. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”

LABOR MARKETS
Strong job creation continued in February, with an average addition of 0.43 workers per firm, adding to a strong 1st quarter of 2020. Finding qualified workers remains the top issue with 25 percent reporting this as their number one problem. Fifteen percent (up 2 points) reported increasing employment an average of 1.6 workers per firm and 2 percent (down 2 points) reported reducing employment an average of 4.9 workers per firm (seasonally adjusted). Fifty-eight percent reported hiring or trying to hire (up 2 points), but 52 percent reported few or no “qualified” applicants for the positions they were trying to fill.

A seasonally-adjusted net 21 percent plan to create new jobs, up 2 points. Not seasonally adjusted, 28 percent plan to increase total employment at their firm (up 4 points), and 1 percent plan reductions (down 2 points). Thirty-eight percent in construction plan to increase their employment, 0 percent plan reductions (not seasonally adjusted).

Thirty-three percent have openings for skilled workers (up 3 points) and 11 percent have openings for unskilled labor (down 3 points). Thirty-four percent of owners reported few qualified applicants for their open positions (up 5 points) and 18 percent reported none (down 2 points). Reports of “few or no qualified applicants” were very high in construction (65 percent), manufacturing (53 percent), and retail (52 percent).

CAPITAL SPENDING
Sixty-two percent reported capital outlays, down 1 point from January’s reading. Of those making expenditures, 43 percent reported spending on new equipment (down 2 points), 26 percent acquired vehicles (down 1 point), and 18 percent improved or expanded facilities (up 1 point). Seven percent acquired new buildings or land for expansion (down 1 point), and 13 percent spent money for new fixtures and furniture (down 1 point). Twenty-six percent plan capital outlays in the next few months, down 2 points from January. Plans to invest were strong in manufacturing (35 percent) and construction (35 percent).

SALES AND INVENTORIES
A net 5 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from January. The net percent of owners expecting higher real sales volumes fell 4 points to a net 19 percent of owners. Actual sales volumes are strong, and owners are a bit more certain of future sales growth.

The net percent of owners reporting inventory increases rose 1 point from January’s reading to a net 7 percent. The net percent of owners viewing current inventory stocks as “too low” increased to negative 4 percent, a 1 point decline from January. The net percent of owners planning to expand inventory holdings decreased from January by 2 point to a net 2 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 36 percent reported raising compensation (unchanged) and a net 19 percent plan to do so in the coming months. Eight percent cited labor costs as their top problem. Firms will likely continue offering improved compensation to attract and retain qualified workers as the labor market remains highly competitive. If vacancies begin to evaporate, it will be an early sign that business is weakening.

The frequency of reports of positive profit trends fell 1 point to a net negative 4 percent reporting quarter on quarter profit improvements. Thirty-one percent of those reporting weaker profits blamed weak sales, 28 percent blamed usual seasonal change, 14 percent cited labor costs, 3 percent cited materials costs, and 7 percent cited price changes. For those reporting higher profits, 70 percent credited sales volumes and 15 percent credited usual seasonal change.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied, down 1 point, matching the record low. Thirty-two percent reported all credit needs met (up 2 points) and 55 percent said they were not interested in a loan (up 1 point). A net 1 percent reported their last loan was harder to get than in previous attempts, down 3 points. Two percent reported that financing was their top business problem (up 1 point). The net percent of owners reporting paying a higher rate on their most recent loan was 3 percent, unchanged. Twenty-eight percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans fell 60 basis points to 5.4 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 fell 4 point to a net 11 percent, seasonally adjusted. Unadjusted, 10 percent (up 3 points) reported lower average selling prices and 21 percent (unchanged) reported higher average prices. Seasonally adjusted, a net 20 percent plan price hikes (down 4 points).

COMMENTARY
The strength of the small business sector (about half of GDP and private sector employment) continues to power economic growth and the record long expansion. Spending and hiring remain historically elevated. Yet all the talk is doom and gloom in the financial news. The Federal Reserve has piled on with a surprise inter-meeting 50-basis point rate cut, but in February, the regular course of commerce continued on main street with the exception of a few “hot spots” where the spread of the coronavirus caused elevated disruptions.

For many important sectors (housing, transportation, manufacturing) labor supply is holding back growth, and interest rate cuts won’t help there. The last half of February financial news was dominated by surges to new stock market records and then it took a dive on coronavirus fears and then again when the Fed announced their rate cut. The wild stock market swings day-to-day are becoming oddly routine but have little to do with the real world where small business owners operate. Perhaps the Fed is trying to address that softness, but the stock market is not the small business economy. Let’s hope small business owners remain more optimistic.

But while business is good, the coronavirus outbreak remains the big unknown. February was another historically strong month for the small business economy, but going forward, the economic outlook is less clear. The current impact on small businesses is limited, but as news breaks with more cases in more areas across the country, uncertainty will become a bigger challenge to small businesses.