Small business owners are showing unprecedented confidence in the economy as the optimism index continues at record high numbers, rising to 107.6 in February, according to the NFIB Small Business Economic Trends Survey, released today. The historically high numbers include a jump in small business owners increasing capital outlays and raising compensation.

“When small business owners have confidence and certainty in the economy, they’re able to hire more workers and invest in their business,” said NFIB President and CEO Juanita Duggan. “The historically high readings indicate that policy changes – lower taxes and fewer regulations – are transformative for small businesses. After years of standing on the sidelines and not benefiting from the so-called recovery, Main Street is on fire again.”

For the first time since 2006, taxes received the fewest votes as the number 1 business problem for small business. The February report shows several components of the Index reached noteworthy highs. In a sign that small businesses are confident and expect growth, owners are spending capital with a net 22 percent planning to raise worker compensation and 66 percent reported capital outlays, up 5 points from January and the highest reading since 2004.

Moreover, owners expecting higher real sales rose 3 points to a net 28 percent, one of the best readings since 2007. Owners also reported higher nominal sales in the past three months at a net 8 percent of all owners. The net percent of owners reporting inventory increases rose 3 percentage points to a net 7 percent on top of a 6-point rise in January.

“Small business owners are telling us loud and clear that they’re optimistic, ready to hire, and prepared to raise wages – it’s one of the strongest readings I’ve seen in the 45-year history of the Index,” said NFIB Chief Economist Bill Dunkelberg. “The fact that several components saw significant increases tells us that small businesses are flourishing in a way we haven’t seen in over a decade.”

Job creation remained strong in February, as reported in the NFIB February Jobs Report, released last week. Finding qualified workers remained as the number one problem for small business owners, surpassing taxes and regulations which have held the top two spots for years.

LABOR MARKETS
Job creation remained solid in the small business sector as owners reported a seasonally adjusted average employment change per firm of 0.22 workers, a strong showing and a repeat of last month. Fourteen percent (up 1 point) reported increasing employment an average of 2.0 workers per firm and 10 percent (up 1 point) reported reducing employment an average of 3.5 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 3 points), but 47 percent (90 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (unchanged), exceeding the percentage citing taxes or the cost of regulation. Thirty-four percent of all owners reported job openings they could not fill in the current period, unchanged from January. Fifteen percent reported using temporary workers, up 3 points and the highest reading since November 2016. A seasonally adjusted net 18 percent plan to create new jobs, down 2 points from January but at historically high levels.


SALES AND INVENTORIES
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months, a 3 point gain following two prior months of strong readings. Consumer spending continues to provide solid support to economic growth. The net percent of owners expecting higher real sales volumes rose 3 points, to a net 28 percent of owners, one of the best readings since 2007. Very positive sales expectations are undoubtedly behind the continued strength in hiring plans and capital investment plans.

The net percent of owners reporting inventory increases rose 3 percentage points to a net 7 percent (seasonally adjusted) on top of a 6 point rise in January. The net percent of owners viewing current inventory stocks as “too low” (positive number means more think stocks are too low than too high, a positive for inventory building) was a net negative 3 percent, 2 points better than January. The net percent of owners planning to add to inventory rose a point from January to a net 4 percent – a solid number. Plans averaged 4 percent in the last six months of 2017 as firms geared up for increasing demand.

CAPITAL SPENDING
Sixty-six percent reported capital outlays, up 5 points from January and the highest reading since 2004. Of those making expenditures, 45 percent reported spending on new equipment (up 1 point), 30 percent acquired vehicles (up 2 points), and 15 percent improved or expanded facilities (down 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 15 percent spent money for new fixtures and furniture (up 2 points). Twenty-nine percent plan capital outlays in the next few months, unchanged from January. Improvements in productivity depend crucially on investment spending in the labor intensive small business sector.

COMPENSATION AND EARNINGS
Reports of higher worker compensation remained at a net 31 percent, the highest reading since 2000 and among the highest in survey history. Tight labor markets are historically associated with high percentages of owners raising worker compensation. Plans to raise compensation fell 2 points to a net 22 percent but still among the highest readings since 2000. The frequency of reports of positive profit trends improved one percentage point to a net negative 3 percent reporting quarter on quarter profit improvements, the best reading since 1987. This followed an 11 point improvement in January.

INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 13 percent seasonally adjusted, after a 3 point increase in January. This is the highest reading since July 2014. Unadjusted, 9 percent of owners reported reducing their average selling prices in the past three months (unchanged), and 22 percent reported price increases (up 3 points after a 4 point gain last month). Seasonally adjusted, a net 24 percent plan price hikes (up 1 point), although far fewer will report actually doing so in the following months. This is the highest reading since 2008.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied, down 1 point and at the record low. Thirty-two percent reported all credit needs met (up 1 point) and 51 percent said they were not interested in a loan, down a point. Only 2 percent reported that financing was their top business problem compared to 22 percent citing the availability of qualified labor. Three percent reported loans “harder to get’, unchanged and at historic lows. Thirty-one percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans was down 20 basis points at 5.7 percent.

COMMENTARY
Growth in the fourth quarter was revised down to 2.5% after 3.2% in the third. This is misleading because consumer spending grew at 3.8 percent, and this is 70 percent of GDP. Business investment grew 6.6 percent. However, the mathematics of GDP subtract from spending all demand that is satisfied with inventory made in prior periods (GDP measure output in the current period). Thus, 0.7 percent was deducted from the growth rate. Additional reductions resulted from a rise in imports (spending money on goods made in other countries does not increase our GDP). All that to say that underlying spending in the economy was much stronger than our GDP math indicated.

The Federal Reserve is expected to raise rates again at the March meeting, the first of three expected raises for the year. It also continues to let some of its $4 trillion dollar portfolio mature without reinvesting the proceeds. This reduces the demand for bonds, putting upward pressure on interest rates. On top of this, the Treasury will be selling a lot of bonds to finance the deficit, which imposes additional pressure on rates. Rising rates will, of course, not be a positive force for equity prices or asset prices in general. Interest rates on variable price loans will rise. Less clear is the impact on long term rates, but they are likely to ease higher.

The small business sector is on fire. The pickup in capital spending is a very favorable sign, as capital spending (crucial for improved productivity) fell way behind from 2009 to 2016. Improved capital spending signals increased confidence in the future of the economy. Hiring is excellent and would be stronger if the labor market were not so tight. This is and will be a major constraint on growth. Inventory investment is strong and will add to GDP this quarter, hopefully it will be purchased later in the year by customers. Inflationary pressures from Main Street are minimal although reported hikes in average selling prices have been edging up. After years of small businesses sitting on the sidelines and not benefiting from the so called recovery, Main Street is again on fire.