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NFIB Small Business Optimism Index gained 3.7 points to 107.5 in November
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OPTIMISM INDEX
The Index of Small Business Optimism gained 3.7 points to 107.5 in November, the second highest reading in the 44-year history of the NFIB surveys (108.0 in July 1983). Eight of the 10 Index components posted a gain and two declined, as Job Openings fell from its record high level and Capital Spending Plans declined 1 point. Eighty percent of the gain in the Index was accounted for by expectations about future business conditions and real sales gains, and the environment for business expansion. Overall, a good environment for better than average economic growth in the fourth quarter.
LABOR MARKETS
After several solid quarters, job creation slowed in the small business sector as business owners reported a seasonally adjusted average employment change per firm of 0.0 workers. Thirteen percent (down 1 point) reported increasing employment an average of 3.0 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 7 points), but forty-four percent (85 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.
Eighteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 2 points), second only to taxes. This is the top ranked problem for those in construction (33 percent) and manufacturing (22 percent), getting more votes than taxes and the cost of regulations. Thirty percent of all owners reported job openings they could not fill in the current period, down 5 points from the record high level reached in July and October. Eleven percent reported using temporary workers, down 3 points. A seasonally adjusted net 24 percent plan to create new jobs, up 6 points to a record high reading. Hiring plans were strongest in professional services, manufacturing and construction.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty-two percent reported all credit needs met (up 3 points) and 48 percent said they were not interested in a loan, down 5 points. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 16 percent citing regulations and red tape, and 18 percent the availability of qualified labor. In short, credit availability and cost is not an issue and hasn’t been for many years. Thirty percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans was down 30 basis points at 5.7 percent, little changed even as the Federal Reserve has been raising rates. Overall, loan demand remains steady, even with cheap money.
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 negative 5 percent, a 6-point decline from October. Consumer spending slowed in November, especially at “brick and mortar” establishments. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 13 points, rising to a net 34 percent of owners, consistent with reported surges in consumer sentiment from the University of Michigan and the Conference Board.
The net percent of owners reporting inventory increases fell 2 points to a net negative 2 percent (seasonally adjusted). Even though sales were weak, owners still reduced their current inventory stocks. The net percent of owners viewing current inventory stocks as “too low” gained 3 points to a net negative 2 percent, a more positive view of current stocks. The net percent of owners planning to add to inventory rose 3 points to a net 7 percent, a solid figure that is supportive of fourth quarter growth. The 7 percent readings from September and November are the best since 2006.
COMPENSATION AND EARNINGS
Reports of higher worker compensation were unchanged at a net 27 percent, historically very strong all year. Owners complain at record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Eighteen percent selected “finding qualified labor” as their top business problem, far more than cite weak sales. Plans to raise compensation fell 4 points in frequency to a net 17 percent, still a solid number, but a surprise as labor markets seem to be getting tighter. The frequency of reports of positive profit trends improved 2 points to a net negative 12 percent reporting quarter on quarter profit improvements, a solid reading historically, among the best since 2007.
CAPITAL SPENDING
Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 40 percent reported spending on new equipment (down 1 point), 29 percent acquired vehicles (up 5 points), and 16 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (down 1 point) 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 only 1 point from October.
INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 10 percent seasonally adjusted. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped, but the percent of owners raising prices, net of those reducing, has doubled since January, a slow crawl to higher inflation. 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
President Trump promised that we would get tired of “winning” in his term, a logical perspective because the Republicans have majorities in both houses of Congress and the Presidency. There has been important success on regulatory relief and in restructuring the judiciary, and they are now close to enacting tax reform as the year winds down.
The Federal Open Market Committee (FOMC) which conducts monetary policy is undergoing a major facelift. Although the appointment of Powell is viewed as replacing Yellen with “Yellen”, that is not the case. Mr. Powell has extensive financial market experience, something few FOMC members possess, which will help guide policy decisions. The Federal Reserve charter calls for governors that represent the business sector, but such appointments are rare, dominated instead by academic economists. Two other new appointees are less philosophically disposed to the notion of government running the economy (rather than markets). More positions will open in the near future and these will be filled with governors who place a different emphasis on the goal of creating inflation, an anathema to most small-business owners. The Federal Reserve will boost rates again in December, but that will leave the Federal Funds rate at about half of the level that history would suggest. The Federal Reserve is still in control of rates and bond investors bet on the Fed, not markets.
The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4 percent GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the 2009-16 weak recovery under President Obama. The change in the management team dramatically improved expectations. There is still much uncertainty about health care and taxes, but it appears that owners believe that whatever Congress finally comes up with will be an improvement and so they remain positive.
Posted: December 12, 2017 Tuesday 07:00 AM