The NFIB Small Business Optimism Index declined 2.6 points in November to 101.4 but remain well above the 47-year historical average reading of 98. Six of the 10 Index components declined and four increased. The NFIB Uncertainty Index decreased 8 points to 90, still a historically high reading. Owners expecting better business conditions over the next 6 months declined 19 points to a net 8%.

“Small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election, which is shaping how they’re viewing future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses.”

Key findings include:
- Earnings trends over the past 3 months declined 4 points to a net negative 7% reporting higher earnings quarter over quarter.
- Inventory investment plans for the next 3 to 6 months decreased 7 points from a 48-year record high of a net 12% in October to a net 5% in November.

As reported in NFIB’s November jobs report, finding qualified employees remains a problem for small business owners with 89% of those hiring or trying to hire reporting few or no “qualified” applicants for the positions they were trying to fill. Twenty-seven percent of owners reported few qualified applicants for their open positions and 20% reported none.

Six percent of owners cited labor costs as their top business problem (down 2 points), but 24% said that labor quality was their top business problem (up 2 points), exceeding the percentages that selected taxes, regulations, and weak sales as their top problem.

Fifty-three percent reported capital outlays in the last six months, unchanged from October’s reading. Of those making expenditures, 38% reported spending on new equipment (up 2 points), 24% acquired vehicles (up 4 points), and 17% improved or expanded facilities (up 1 point). Five percent acquired new buildings or land for expansion (unchanged) and 13% spent money on new fixtures and furniture (up 1 point). Down 1 point from October, 26% of owners plan capital outlays in the next few months.

A net 5% of all owners (seasonally adjusted) reported higher nominal sales in the past 3 months, down 1 point from October but holding at the current recovery level. The net percent of owners expecting higher real sales volumes decreased 1 point to a net 10% of owners, a solid reading.

The net percent of owners reporting inventory increases rose 1 point to a net negative 4%. The net percent of owners viewing current inventory stocks as “too low” remained at 5%, up 1 point from October. Plans to invest in more inventory accumulation collapsed from record levels as expected business conditions weakened, falling 7 points to a net 5% of all firms.

The net percent of owners raising average selling prices increased 3 points to a net 18% (seasonally adjusted). Unadjusted, 8% of owners reported lower average selling prices and 23% reported higher average prices.

Price hikes were the most frequent in retail (28% higher, 4% lower) and wholesale (23% higher. 7% lower). Seasonally adjusted, a net 21% of owners plan price hikes (up 1 point).

A net 24% of owners reported raising compensation, and a net 20% plan to do so in the coming months.

The frequency of reports of positive profit trends decreased 4 points to a net negative 7% reporting quarter-on-quarter profit improvement, historically a favorable reading. Among owners reporting weaker profits, 55% blamed weak sales, 8% cited usual seasonal change, 8% cited a higher cost of materials, 6% cited lower prices, and 3% cited labor costs. For owners reporting higher profits, 73% credited sales volumes, 9% cited usual seasonal change, and 8% cited higher prices.

Two percent of all owners reported that all their borrowing needs were not satisfied, 25% reported all credit needs were met, and 58% said they were not interested in a loan. A net 2% reported their last loan was harder to get than in previous attempts.

One percent of owners reported that financing was their top business problem, unchanged from last month. The net percent of owners reporting paying a higher rate on their most recent loan was negative 4%, up from negative 6 points in October. Twenty-two percent of all owners reported borrowing on a regular basis, down 3 points.

LABOR MARKETS
Labor market indicators remained strong. Thirty-four percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from October. Twenty-nine percent have openings for skilled workers (unchanged) and 13 percent have openings for unskilled labor (down 1 point). Firms increased employment by 0.16 workers per firm on average over the past few months, an increase of 0.06 workers per firm compared to October. Twelve percent (up 1 point) reported increasing employment an average of 2.6 workers per firm and 14 percent (unchanged) reported reducing employment an average of 3.1 workers per firm (seasonally adjusted). Owners have plans to fill open positions, with a seasonally adjusted net 21 percent planning to create new jobs in the next three months, up 3 points from October. Overall, 53 percent reported hiring or trying to hire in November, down 2 points from the previous month. Forty-seven percent (89 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. Twenty-seven percent of owners reported few qualified applicants for their open positions (down 1 point) and 20 percent reported none (unchanged). Six percent cited labor costs as their top business problem (down 2 points) but 24 percent said that labor quality was their top business problem (up 2 points), exceeding the percentages selecting taxes, regulations and weak sales as their top problem.

CAPITAL SPENDING
Fifty-three percent reported capital outlays in the last six months, unchanged from October. Of those making expenditures, 38 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 4 points), and 17 percent improved or expanded facilities (up 1 point). Five percent acquired new buildings or land for expansion (unchanged), and 13 percent spent money for new fixtures and furniture (up 1 point). Twenty-six percent plan capital outlays in the next few months, down 1 point from October.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 24 percent reported raising compensation (up 1 point) and a net 20 percent plan to do so in the coming months, up 2 points. As strange as this labor market seems with 20 million on unemployment benefits and the unemployment rate double what it was at the beginning of the year, the labor market is tight. The frequency of reports of positive profit trends decreased 4 points to a net negative 7 percent reporting quarter on quarter profit improvement, historically a favorable reading. Among owners reporting weaker profits, 55 percent blamed weak sales, 8 percent cited usual seasonal change, 8 percent cited a higher cost of materials, 6 percent cited lower prices, and 3 percent cited labor costs. For owners reporting higher profits, 73 percent credited sales volumes, 9 percent cited usual seasonal change, and 8 percent cited higher prices.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-five percent reported all credit needs met (down 4 points) and 58 percent said they were not interested in a loan (up 2 points). A net 2 percent reported their last loan was harder to get than in previous attempts (down 1 point). Credit markets have never been friendlier, and the Federal Reserve promises that will continue indefinitely. One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 4 percent, up 2 points from October. Owners are enjoying the low interest rates supported by the Fed. The average rate paid on short maturity loans was 4.7 percent, down 0.2 points from October. Loan rates have never been so consistently low. Twenty-two percent of all owners reported borrowing on a regular basis (down 3 points).

SALES AND INVENTORIES
A net 5 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 1 point from October but holding at the current recovery level. The plunge in sales was as deep as readings during the Great Recession, but lasted only months, not years. The improvement in sales was unprecedented. The net percent of owners expecting higher real sales volumes decreased 1 point to a net 10 percent of owners, a surprisingly small decline in light of the 19-point decline in the net percent of owners expecting better business conditions.

INFLATION
The net percent of owners raising average selling prices increased 3 points to a net 18 percent, seasonally adjusted. Price hikes have returned to normal levels and there is no surge in the inflation rate anticipated by current price levels. Unadjusted, 8 percent (down 2 points) reported lower average selling prices and 23 percent (unchanged) reported higher average prices. Price hikes were most frequent in retail (28 percent higher, 4 percent lower) and wholesale (23 percent higher, 7 percent lower). Seasonally adjusted, a net 21 percent plan price hikes (up 1 point). No pressure on prices in the near future.

COMMENTARY
After the 2016 election, the NFIB Optimism Index rose from 95 in October 2016 to 106 in December 2016, a clear statement on the election results. The dramatic improvement in expectations led to a record high of 108.8 in August 2018 as promised policies took place. This time around, the Index was 104 in October, after a plunge to 94 in April, and now stands at 101.4, a decline of 2.6 points (in contrast to the 11-point gain over the same period in 2016). The Uncertainty Index hit a record high of 100 in November 2016. The Index reached 98 in October this year, but fell 8 points to 90 in November. There are still major uncertainties to be resolved, most important the Covid-19 crisis and the Georgia election which will shape political control in the Senate.

The economic indicators exhibited massive swings over a period of a few months this year that took years to complete in the Great Recession. This occurred because economic activity was not disrupted by the usual economic forces, but rather by a deadly virus and subsequent government directed shutdown of commerce that was completely unanticipated. When state government policies were relaxed, the economy tried to bounce back to where it was a few months earlier. The unemployment rate swung from under 4 percent in February, to nearly 15 percent in April, and now down to under 7 percent in November. GDP declines of 30 percent and gains of 33 percent a few months later (annual rates) left GDP more than 5 percent below year ago levels, a deficit that double-digit growth in Q4 might eliminate.

Employment also exhibited wild swings, with unemployment rising from 5.8 million in March to 23.1 million in April, falling to 16.3 million in October. The unemployment rate was 3.5 percent in February, 14.7 percent in April, now down to 6.7 percent, still an historically high rate. The decline was due in part to a reduction of five million people in the labor force than a year ago. The recovery will remain uneven as the country’s major GDP producing states, California and New York, are again restricting more commerce. The virus and our leaders’ responses to the virus, will continue to impact the economy for the next six months or more.

The share of total employment accounted for by firms with 500 or more workers has risen (vs. 2019) while the share accounted for by small employers has declined, no surprise because Covid-19 policies have targeted business activity that disproportionately affect small firms. Amazon has not had to close, but restaurants, gyms, small retailers, etc. have had to close for some periods or operate under heavy traffic restrictions. This has been the major source of increased unemployment. Solving this problem will require getting our small business sector back in operation. Amazon is doing just fine. The arrival of effective vaccines will make this far easier to accomplish as would the use of more sensible government policies than those currently used to manage the small business sector.