The NFIB Small Business Optimism Index rose to 95.8 in February, a slight bump from January but still below the 47-year average reading of 98. The NFIB Uncertainty Index decreased five points to 75.

“Small business owners worked hard in February to overcome unexpected weather conditions along with the ongoing COVID-19 pandemic,” said NFIB Chief Economist Bill Dunkelberg. “Capital spending has been strong, but not on Main Street. The economic recovery remains uneven for small businesses, especially those still managing state and local regulations and restrictions. Congress and the Biden administration must keep small businesses a priority as they plan future policy legislation.”

Key findings include:
- Five of the 10 Index components improved, four declined, and one was unchanged.
- Forty percent of owners reported job openings that could not be filled, an increase of seven points from January.
- Owners expecting better business conditions over the next six months increased four points to a net negative 19%, a poor reading.
- Earnings trends over the past three months improved five points to a net negative 11% reporting higher earnings compared to the January reading.

As reported in NFIB’s monthly jobs report, 56% of owners reported hiring or trying to hire in February, up five points from January. Owners have plans to fill open positions with a seasonally adjusted net 18% planning to create new jobs in the next three months, up one point from January.

Forty percent of owners reported job openings they could not fill in the current period, up seven points. Thirty-three percent have openings for skilled workers and 16% have openings for unskilled labor.

Fifty-seven percent of small employers reported capital outlays in the last six months, up two points from January. Of those making expenditures, 40% reported spending on new equipment, 28% acquired vehicles, and 12% improved or expanded facilities. Four percent of owners acquired new buildings or land for expansion and 10% spent money for new fixtures and furniture. Twenty-three percent of owners plan capital outlays in the next few months, up one point. Reports of actual spending and spending plans are historically low.

Seasonally adjusted, a net 2% of all owners reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes decreased two points to a net negative 8%.

The net percent of owners reporting inventory increases rose one point to a net negative 3%. A net 5% of owners view current inventory stocks as “too low” in February. A surprisingly low net 2% of owners plan inventory investment in the coming months, down two points from January.

Also seasonally adjusted, the net percent of owners raising average selling prices increased eight points to a net 25%. Unadjusted, 10% reported lower average selling prices and 35% reported higher average prices. Price hikes were the most frequent in retail (39% higher, 11% lower) and wholesale (31% higher, 4% lower). A net 34% (seasonally adjusted) plan price hikes in the next three months, an increase of 12 points over the past two months.

A net 25% (seasonally adjusted) reported raising compensation and a net 19% plan to do so in the coming months.

Nine percent of owners cited labor costs as their top business problem and 24% said that labor quality was their top business problem and the overall concern, leaving taxes and regulatory costs in second and third positions.

The frequency of reports of positive profit trends improved five points to a net negative 11% reporting quarter-on-quarter profit improvement. Among the owners reporting lower profits, 46% blamed weaker sales, 21% cited the usual seasonal change, 8% cited labor costs, 5% cited a higher cost of materials, and 2% cited lower prices. For owners reporting higher profits, 65% credited sales volumes, 17% cited usual seasonal change, and 7% cited higher prices.

Only 2% of owners reported that all of their borrowing needs were not satisfied. Twenty-eight percent reported all credit needs were met and 58% said they were not interested in a loan. A net 1% reported that their last loan was harder to get than in previous attempts.

LABOR MARKETS
Job growth continued in February. Firms increased employment by 0.34 workers per firm on average over the past few months, following equally good readings in December and January. Forty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 7 points from January. Thirty-three percent have openings for skilled workers (up 5 points) and 16 percent have openings for unskilled labor (up 4 points). Owners are clearly looking ahead to an improved economy. Current and promised stimulus money will add a lot of juice to consumer spending, so firms need to “hire up” and “stock up.” Fifty-one percent of the job openings in construction are for skilled workers, up 7 points. Overall, 56 percent reported hiring or trying to hire in February, up 5 points from January. Owners have plans to fill open positions, with a seasonally adjusted net 18 percent planning to create new jobs in the next three months, up 1 point from January. The Covid-19 pandemic continues to disrupt the labor market with significant populations of otherwise working adults having to stay home to care for family members, protect themselves from contracting the virus, or not able to transition previous work experience quickly to available jobs. Finding qualified employees remains a problem. Fifty-one percent (91 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in February, up 5 points. Where there are open positions, labor quality remains a problem. Twenty-six percent of owners reported few qualified applicants for their open positions (unchanged) and 25 percent reported none (up 5 points).

CAPITAL SPENDING
Fifty-seven percent reported capital outlays in the last six months, up 2 points from January. Of those making expenditures, 40 percent reported spending on new equipment (down 1 point), 28 percent acquired vehicles (up 1 point), and 12 percent improved or expanded facilities (down 3 points). Four percent acquired new buildings or land for expansion (down 1 point), and 10 percent spent money for new fixtures and furniture (down 2 points). Twenty-three percent plan capital outlays in the next few months, up 1 point from January

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 25 percent reported raising compensation (unchanged) and a net 19 percent plan to do so in the coming months, up 2 points. There will be continued pressure on worker compensation as the economy opens up. Nine percent cited labor costs as their top business problem (up 2 points) and 24 percent said that labor quality was their top business problem, up 3 points from January and the top overall concern, leaving taxes and regulatory costs in second and third positions. The frequency of reports of positive profit trends improved 5 points to a net negative 11 percent reporting quarter on quarter profit improvement. Among owners reporting lower profits, 46 percent blamed weaker sales, 21 percent cited the usual seasonal change, 8 percent cited labor costs, 5 percent cited a higher cost of materials, and 2 percent cited lower prices. For owners reporting higher profits, 65 percent credited sales volumes, 17 percent cited usual seasonal change, and 7 percent cited higher prices.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-eight percent reported all credit needs met (up 4 points) and 58 percent said they were not interested in a loan (down 3 points). A net 1 percent reported their last loan was harder to get than in previous attempts (unchanged). 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 2 percent, up 2 points from January and the 13th consecutive month with more owners reporting lower rates than higher rates on their last loan. The average rate paid on short maturity loans was 4.9 percent, unchanged from January. Twenty-six percent of all owners reported borrowing on a regular basis (up 3 points).

SALES AND INVENTORIES
A net 2 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 9 points from January. The net percent of owners expecting higher real sales volumes decreased 2 points to a net negative 8 percent. The net percent of owners reporting inventory increases rose 1 point to a net negative 3 percent. More owners are reporting inventory declines than gains because sales have been so strong that their supply chains can’t keep them stocked as desired. Because of the strong sales gains, a net five percent of owners view current inventory stocks as “too low” in February, unchanged from January and at record high levels. A surprisingly low net 2 percent of owners plan inventory investment in the coming months, down 2 points from January.

INFLATION
The net percent of owners raising average selling prices increased 8 points to a net 25 percent, seasonally adjusted. Unadjusted, 10 percent (down 1 point) reported lower average selling prices and 35 percent (up 8 points) reported higher average prices. Price hikes were most frequent in retail (39 percent higher, 11 percent lower) and wholesale (31 percent higher, 4 percent lower). Seasonally adjusted, a net 34 percent plan price hikes (up 6 points), an increase of 12 points over the past two months. Low inventories and solid sales are expected to present more opportunities to raise prices.

COMMENTARY
2021 got off to a good start. Thanks to government stimulus, disposable income rose over 11%. Over 90% of the gain is due to stimulus checks mailed in January, and to improved unemployment benefits. Consumer spending rose a solid 2.5%, and the savings rate rose to over 20% in January, the second highest rate in history. Consumers paid off debt and fattened their bank accounts. The consumer experience is not uniform, however, with employment in the top third of the income distribution passing its pre-Covid level, but lagging badly in the lower third – service sector workers are a big part of this. The Main Street economy is bifurcated; construction, manufacturing, transportation, and professional services are doing well. Other services, restaurants, retail (non-internet) doing poorly. Employment is still 8-10 million below levels reached in JanuaryFebruary of 2020, just before the Covid-19 pandemic was more broadly recognized.

Capital spending has been strong for the last three quarters, but not on Main Street. In recent months most of the new homes sold have not been built yet, exposing builders to rapid increases in materials prices. Most of the expected $1,400 checks will be saved, not spent but the extra unemployment and childcare credits will be. Inventory building is still strong. Added to strong consumer spending, it appears that GDP growth (real) will be very strong in Q1, 4% or better, a great performance in any year. However, this is growth supported by government stimulus, not a strong private sector.

On Main Street, the picture is less exuberant. The Optimism Index is at 95.8, 2 points below the 47-year average of 98, and far from the 108- reading reached in 2017. Compared to a year ago, the net percent of firms planning to increase employment is 5 points lower, although the percent with unfilled job openings is 2 percentage points higher (strong construction, manufacturing, transportation, and professional services sectors). But the overall outlook for the economy is down, 41 percentage points for expected business conditions in 6 months, 18 percentage points lower for expected real sales, and 20 points for “good time to expand.” Hiring, capital spending, and inventory investment spending all depend on expectations about future sales and business conditions, and those are not strong at all. A lot of Main Street is still not fully operational, amusements, restaurants, gyms, specialty retail shops, and more, all dependent on “foot traffic.” There is still significant policy uncertainty, for Covid-19, tax policy, and the focus of regulations from the regulatory agencies. Much will be learned over the next few months as the course of the virus becomes clearer and Biden nominees are confirmed and get to work.