The NFIB Small Business Optimism Index continued its historic 23-month positive trend, with a reading of 107.9 in September, the third highest reading in the survey’s 45-year history. In the small business half of the economy, 2018 has produced 45-year record high measures of job openings, hiring plans, actual job creation, compensation increases (actual and planned), profit growth, and inventory investment.

The September 2018 survey showed:
Actual capital spending in the past few months rose significantly.
Average employment change per firm was solid.
Owners bulked up inventories.
Compensation increases set a new record.

“This is the longest streak of small business optimism in history, evidence that tax cuts and regulatory rollbacks are paying off for the economy as a whole,” said NFIB President and CEO Juanita D. Duggan. “Our members say that business is booming and prospects continue to look bright.”

Actual investment spending improved as prospects for the economy remain strong. Sixty percent of owners reported capital outlays, up four points from August. Of those making expenditures, 41 percent reported spending on new equipment (up two points), 26 percent acquired vehicles (up four points), and 16 percent improved or expanded facilities (down two points).

Consumer spending temporarily slowed in August, likely producing excess inventories but has picked up again which will reverse the build-up. The net percent of owners expecting higher real sales volumes rose three points to a net 29 percent of owners. Owners reporting inventory increases rose one point to a net five percent (seasonally adjusted). Strong expectations for higher real sales translate into higher expected returns on capital investments as well as a need for more employees.

“The economy continues to deliver a spectacular performance for one so near its record length. Small business owners continue to face labor force challenges but are increasing compensation to keep up,” said NFIB Chief Economist Bill Dunkelberg. “With profits and investment remaining strong, our hope is that policymakers will stay the course and not screw around with success.”

A record net 37 percent of owners reported raising overall compensation, as reported in last week’s NFIB monthly jobs report. This surpasses the previous record of a net 35 percent in May 2018. Twenty-four percent plan to increase total compensation at their firm and six percent plan reductions. Sixty-one percent of owners reported hiring or trying to hire, with 87 percent of those reporting few or no qualified workers. Thirty-eight percent of owners reported job openings they could not fill in the current period, unchanged from last month.

LABOR MARKETS
Job creation picked up again in September, rising to a net addition of 0.15 workers per firm (including those making no change in employment). Thirteen percent (down 2 points) reported increasing employment an average of 4.6 workers per firm and 11 percent (up 1 point) reported reducing employment an average of 1.9 workers per firm (seasonally adjusted). Sixty-one percent reported hiring or trying to hire (down 1 point), but 53 percent (down 2 points and 87 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, down 3 points but historically very high. Thirty-eight percent of all owners reported job openings they could not fill in the current period, unchanged from August’s record high. Thirty-six percent have openings for skilled workers up 1 point and a record high. Fifteen percent have openings for unskilled labor, down 1 point. Fourteen percent reported using temporary workers, down 3 points. A seasonally-adjusted net 23 percent plan to create new jobs, down 3 points from August’s record high.

SALES AND INVENTORIES
A net 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points. Over 35 percent of the owners in construction, manufacturing, and the wholesale trades reported sales volumes gains. The net percent of owners expecting higher real sales volumes rose 3 points to a net 29 percent of owners, a very strong reading.

The net percent of owners reporting inventory increases rose 1 point to a net 5 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” rose 2 points to a net negative 1 percent (a positive number means more think stocks are too low than too high, a positive for inventory building). The net percent of owners planning to build inventories fell 7 points to a net 3 percent, reversing August’s record net 10 percent, but the fifteenth positive reading in the past 23 months.

CAPITAL SPENDING
Sixty percent reported capital outlays, up 4 points from August. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 26 percent acquired vehicles (up 4 points), and 16 percent improved or expanded facilities (down 2 points). Seven percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (down 2 points). Thirty percent plan capital outlays in the next three to six months, down 3 points, but the second best reading this year.

INFLATION
The net percent of owners raising average selling prices dropped 2 points to a net 15 percent seasonally adjusted. Thirty-one percent of the construction firms reported raising prices (4 percent reduced) while 42 percent of the firms in agriculture report lower average prices (16 percent raised). The average net percent of firms raising price was negative in each of the first three quarters of 2016, averaging a negative 2 percent. In the fourth quarter it was 2 percent and has marched steadily upward until the past few months. Seasonally adjusted, a net 24 percent plan price hikes, unchanged since May.

COMPENSATION AND EARNINGS
Reports of higher worker compensation rose 5 points to a new record of a net 37 percent of all firms, surpassing May’s record reading of a net 35 percent. Plans to raise compensation rose 3 points to a net 24 percent, a near-record high. Owners complain at record rates about labor quality issues, with 87 percent of those hiring or trying to hire in September reporting few or no qualified applicants for their open positions. Twenty-two percent (down 3 points) selected “finding qualified labor” as their top business problem, more than cited taxes, weak sales, or the cost of regulations as their top challenge (last month was a record high, 25 percent). The frequency of reports of positive profit trends fell 2 points to a net negative 1 percent reporting quarter on quarter profit improvements, historically very high.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and just 1 point above the record low. Twenty-seven percent reported all credit needs met (down 6 points) and 53 percent said they were not interested in a loan, up 2 points. Three percent reported that financing was their top business problem (up 1 point). A net 3 percent (down 2 points) reported loans “harder to get,” historically very low. The percent of owners reporting paying a higher rate on their most recent loan was 1 point lower at a net 16 percent. Twenty-nine percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans rose 120 basis points to 7.3 percent, a substantial jump.

COMMENTARY
The economy continues to deliver an “amazing” performance. A large part of that has been the revival of the small business sector that began with the 2016 election results. Animal spirts were released, optimism soared, and spending and hiring followed.

Since the election, results of the Administration’s economic policies have been exceptional to date. In the small business half of the economy, this year has produced 45 year record high measures of headline optimism, job openings, hiring plans, actual job creation, compensation increases (actual and planned), profit growth, and inventory investment. Actual capital spending has also posted substantial gains.

At the conference of the National Association for Business Economics this month, a major focus was on the amount of debt, public and private, being accumulated around the world, not just in the U.S. But, apparently small business owners are not participating in that “party” as regular borrowing activity is historically low and the percent of owners “not interested in a loan” is historically high. Only three percent say they didn’t get all the credit they wanted and 3 percent report credit as their top business problem, about as low as it can go.

The economy is growing faster than our ability to support that growth without inflation or significant productivity gains. Many analysts observe that with the labor force growing about 0.7 percent a year and output per worker (productivity) growing about 1.5 percent per year (at best), it is hard to support demand growth in excess of about 2 percent (the sum of the two which measures our growth in the capacity to produce output). So, with growth running at 3 percent and higher, this presents issues in the future. A good example of this is the impact of the shortage of labor on our ability to grow and produce more stuff. Of course, there are changes that can neutralize some of these problems including higher labor force participation rate induced by higher compensation, labor saving technology, new scientific breakthroughs, and the like. Hopefully policymakers won’t screw around with success.