Small business optimism eclipsed pre-shutdown levels, increasing 1.5 points to 105.0 in May. Six components in the Small Business Optimism Index improved, three were unchanged, and one dipped. Capital spending plans increased along with actual outlays. Small business owners’ expectations for sales, business conditions, and expansion all rose, as the previously reported inventory imbalance was resolved. Earnings, job creation, and compensation remained very strong.

“Optimism among small business owners has surged back to historically high levels, thanks to strong hiring, investment, and sales,” said NFIB President and CEO Juanita D. Duggan. “The small business half of the economy is leading the way, taking advantage of lower taxes and fewer regulations, and reinvesting in their businesses, their employees, and the economy as a whole.”

Business owners reporting capital outlays increased six points to 64 percent, the highest reading since February 2018. Thirty percent plan capital outlays in the next few months, up three points and historically high. Plans to invest were most frequent in transportation (45 percent), manufacturing (39 percent), professional services (39 percent), and construction (31 percent).

“Small business owners are demonstrating a continued confidence in the strength of the economy and are betting capital spending dollars on it,” said NFIB Chief Economist William Dunkelberg. “This solid investment performance is supporting ongoing improvements in productivity and real wages.”

A net nine percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from April and historically strong. The net percent of owners expecting higher real sales volumes rose three points to a net 23 percent of owners. A net 16 percent expect better business conditions, up three points, and 30 percent say now is a good time to expand, a five-point increase. The frequency of reports of positive profit trends improved two points to a net negative one percent, a very solid gain.

The net percent of owners reporting inventory increases was unchanged at a net two percent (seasonally adjusted), consistent with the significant build up in the first quarter that added nearly one point to GDP growth. The net percentage of owners viewing current inventory stocks as “too low” was unchanged at a net negative four percent. The net percentage of owners planning to expand inventory holdings was unchanged at a net two percent, indicating the excessive inventory build in Q1 has been substantially resolved overall, helped by strong sales gains.

Inflation pressures remained subdued, even though reports of compensation gains remained at historically high levels. The government reported a substantial improvement in productivity and an associated decline in unit labor costs which offsets the need to increase prices to cover rising labor costs. The net percentage of owners raising average selling prices fell three points to a net 10 percent, seasonally adjusted. A net 20 percent plan price hikes, seasonally adjusted (down one point).

As reported in the May NFIB Jobs Report, small business owners added a net addition of 0.32 workers per firm, with 25 percent citing the difficulty of finding qualified workers as their Single Most Important Business Problem, matching the record high. Sixty-two percent of owners reported hiring or trying to hire employees, up five points from last month, but 54 percent reported few or no qualified applicants for the positions they were trying to fill (up five points).

LABOR MARKETS
Sixty-two percent reported hiring or trying to hire (up 5 points), but 54 percent (up 5 points) reported few or no qualified applicants for the positions they were trying to fill. Twenty-five percent of all owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, equaling the record high. Thirty-eight percent of all owners reported job openings they could not fill in the current period, unchanged from April and 1 point below the record high. In construction, 59 percent had openings, 93 percent of those openings were for skilled workers. Fourteen percent of all firms reported using temporary workers. A seasonally-adjusted net 21 percent plan to create new jobs, up 1 point. Not seasonally adjusted, 29 percent plan to increase total employment at their firm (down 2 points), and 3 percent plan reductions (unchanged). Thirty-two percent have openings for skilled workers (unchanged) and 16 percent have openings for unskilled labor (up 1 point). Thirty-three percent of owners reported few qualified applicants for their open positions (up 2 points) and 21 percent reported none (up 3 points).

SALES AND INVENTORIES
A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from April and historically strong. The net percent of owners expecting higher real sales volumes rose 3 points to a net 23 percent of owners, a solid reading. The pace of economic growth is solid and consumers as well as businesses-to-business are an important source of the improvement in sales. The net percent of owners reporting inventory increases was unchanged at 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” was unchanged at a net negative 4 percent. Relatively few owners viewed stocks as excessive. The net percent of owners planning to expand inventory holdings was unchanged at a net 2 percent, a solid number. Overall, owners are ready to place new orders and build some inventory in anticipation of stronger real sales.

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
Sixty-four percent reported capital outlays, up 6 points, the highest reading since February 2018. Of those making expenditures, 44 percent reported spending on new equipment (up 3 points), 29 percent acquired vehicles (up 3 points), and 19 percent improved or expanded facilities (up 3 points). Six percent acquired new buildings or land for expansion (down 1 point) and 14 percent spent money for new fixtures and furniture (up 1 point). Overall, a very solid investment performance, supportive of continued improvements in productivity and real wages.

Thirty percent plan capital outlays in the next few months, up 3 points and historically high. Plans to invest were most frequent in transportation (45 percent), manufacturing (39 percent), professional services (39 percent), and construction (31 percent). Investment spending has been solid for the past two years. Small business owners clearly remain confident in the strength of the economy and are willing to bet capital spending dollars on it.

INFLATION
The net percent of owners raising average selling prices fell 3 points to a net 10 percent, seasonally adjusted. Seasonally adjusted, a net 20 percent plan price hikes (down 1 point). While 11 percent reported cutting selling prices, only 2 percent plan to do so, suggesting that most price cutting is an unanticipated, unplanned response to market conditions. Overall, a comforting report for inflation watchers but less so for the Federal Reserve that would like to see more inflation.

COMPENSATION AND EARNINGS
Reports of higher worker compensation were unchanged at a lofty net 34 percent of all firms (unchanged). Plans to raise compensation posted a 4-point gain to a net 24 percent. Overall, reports of rising compensation are holding at historically high levels. Twenty-five percent (up 1 point) selected “quality of labor” as their top business problem, more than cited taxes or regulations. The frequency of reports of positive profit trends improved 2 points to a net negative 1 percent, a very solid gain.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-four percent reported all credit needs met (up 2 points) and 54 percent said they were not interested in a loan, up 3 points. Four percent reported their last loan was harder to get than the previous one, unchanged and historically low. Two percent reported that financing was their top business problem (unchanged) compared to 16 percent citing taxes. The percent of owners reporting paying a higher rate on their most recent loan was 12 percent, down 1 point. Thirty-one percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans rose 110 basis points to 7.8 percent. Overall, credit markets have been very supportive of growth and will not likely become an impediment this year, even if lending rates do rise.

COMMENTARY
The first quarter GDP revision put the growth rate at 3.1 percent, only 0.1 percent lower than first thought. April is not looking quite as strong, with investment spending at large firms and manufacturing looking a bit weaker. But one month does not a quarter make. The financial press is replete with concerns about a growing “weakness,” both here and abroad, but there is no sign of concern on Main Street as the Optimism Index ventured into rarely reached territory. The surge in optimism was supported by solid gains in reported capital spending, hiring, inventory investment, and profit trends.

Slower growth is not bad in a fully employed economy that can’t find enough workers to fill open job positions. The labor supply has become a constraint on growth, especially in construction and transportation. An even lower unemployment rate would be hard to sustain because the economy is at “full employment,” and that can be accommodated with growth rates under 3 percent. Many observers are arguing that the economy needs another “artificial stimulus” from the Federal Reserve. Not so. Interest rates are low enough to keep credit flowing. What is important is growth that is strong enough to make new investments look profitable. This should not be difficult because we are at “full employment” so our capital stock needs to be expanded and upgraded to work with our existing supply of labor.

Productivity increased at a 3.6 percent annual rate in the first quarter, the best reading in a decade. The pickup in productivity growth coincides with a ramp up in investment spending on Main Street, which lagged for the decade prior to 2017. Half of private employment is in the small business sector, so productivity improvement there is important for income growth for U.S. workers. It is important to keep policy focus on the small business half of the economy to ensure that it is not dissuaded from investing and hiring because of “policy oversight” like not making the tax cuts permanent.