Research >> Economics

NFIB Small Business Optimism Index rose 1.4 points to 104.7 in July


Optimism among small business owners bounced back in July as expectations for business conditions, real sales, and expansion made solid gains. The NFIB Small Business Optimism Index rose 1.4 points to 104.7, with seven of 10 components advancing, two falling, and one remaining unchanged. The Uncertainty Index fell 10 points, reversing a surge in June that reached the highest level since March 2017.

“While many are talking about a slowing economy and possible signs of a recession, the 3rd largest economy in the world continues to defy expectations, generating output, creating value, and expanding the economy,” said NFIB President and CEO Juanita D. Duggan. “Small business owners want to grow their operations, and the only thing stopping them is finding qualified workers.”

In addition to improvement in expectations for business conditions, real sales, and expansion, key findings from the July index include:

- Small business owners’ plans to create new jobs and make capital outlays advanced and earnings trends improved, supported by a solid improvement in sales trends.
- Plans to order new inventories posted a solid gain.
- After surging last month, reports of higher average selling prices stabilized, with no evidence of a pickup in inflation.
- Credit conditions remain very supportive, interest rates on loans are historically low, and there are few complaints about credit availability.

“Contrary to the narrative about impending economic doom, the small business sector remains exceptional. This month’s index is a confirmation that small business owners remain very optimistic about the economy but are being hamstrung by not finding the workers they need,” said NFIB Chief Economist William Dunkelberg.

Expectations for better business conditions increased five points while those reporting the current period as a good time to expand advanced two points. The net percent of owners expecting higher real sales volumes rose five points to a net 22 percent of owners.

Up three points from last month, 57 percent of owners reported capital outlays. Of those making expenditures, 41 percent reported spending on new equipment (up one point), 25 percent acquired vehicles (up three points), and 16 percent improved or expanded facilities (up four points). Six percent acquired new buildings or land for expansion, and 12 percent spent money for new fixtures and furniture.

The frequency of reports of positive profit trends improved three points to a net negative four percent reporting quarter on quarter profit improvements, historically strong. Thirty-one percent of those reporting weaker profits blamed sales (up four points), 14 percent blamed labor costs (up two points), and 10 percent cited lower selling prices (up one point). For those owners reporting higher profits, 57 percent credited sales volumes (down 10 points from last month), and seven percent credited higher selling prices.

Unchanged from June, a net seven percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, which is a very solid reading. Consumer sentiment has improved in recent months, and revised government data confirm what small business owners have been reporting. Consumer spending is solid.

The net percent of owners raising average selling prices fell one point to a net 16 percent (seasonally adjusted), following a seven-point surge in June. Eight percent (unadjusted) reported lower average selling prices, and 25 percent reported higher average prices. Price hikes were the most frequent in wholesale trades (13 percent lower, 25 percent higher), retail trades (eight percent lower, 31 percent higher), agriculture (17 percent lower, 27 percent higher), and construction (seven percent lower, 32 percent higher). These segments of the economy are likely to be feeling the impact of tariffs.

Unchanged from last month and historically low, three percent of owners reported that all of their borrowing needs were not satisfied. Twenty-eight percent reported that all credit needs were met (down one point), and 56 percent said they were not interested in a loan (up one point). Two percent reported that their last loan was harder to get than the previous one, which is one point above the record low. Credit conditions are about as supportive as they have ever been in the 46-year survey history.

Small business owners were asked in the July survey if a 100-basis point reduction in borrowing costs would change their capital spending plans over the next 12 months. Twelve percent said “yes”, and 21 percent said “no”. Twenty-four percent were not sure, and 43 percent were not planning on borrowing money.

As reported in the NFIB Jobs Report, business job creation slowed in July, falling to an average addition of 0.12 workers per firm. A record 26 percent of small business owners surveyed cited the difficulty of finding qualified workers as their single most important business problem.

LABOR MARKETS
Job creation slowed in July, falling to an average addition of 0.12 workers per firm on average. Finding qualified workers is becoming increasingly difficult with a 46-year record high of 26 percent reporting finding qualified workers as their number one problem. Ten percent (down 2 points) reported increasing employment an average of 3.8 workers per firm and 7 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). The shortage of potential employees relative to the demand for them is slowing economic growth. The demand for workers has not faded and remains at record levels.

Sixty-three percent reported hiring or trying to hire (up 5 points), but 56 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Few owners are reducing employment, indicating that initial claims for unemployment will remain historically low.

CAPITAL SPENDING
Fifty-seven percent reported capital outlays, up 3 points. Of those making expenditures, 41 percent reported spending on new equipment (up 1 point), 25 percent acquired vehicles (up 3 points), and 16 percent improved or expanded facilities (up 4 points). Six percent acquired new buildings or land for expansion (up 1 point) and 12 percent spent money for new fixtures and furniture (unchanged). Capital spending improved over June levels but remains a bit anemic historically. The Uncertainty Index fell 10 points, reversing a surge in June to the highest level since March 2017. The resumption of the tariff wars may raise uncertainty again though in the coming months. Owners are more reluctant to make major spending commitments when the future becomes less certain so the July’s reversal is supportive of increased capital investment.

SALES AND INVENTORIES
A net 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months. Consumer sentiment has improved in recent months and revised government data confirm what small business owners have been reporting, consumer spending is solid. The net percent of owners expecting higher real sales volumes rose 5 points to a net 22 percent of owners.

The net percent of owners reporting inventory increases rose 2 points to a net 2 percent. The net percent of owners viewing current inventory stocks as “too low” fell 3 points to a net negative 3 percent. The net percent of owners planning to expand inventory holdings was unchanged at a net 3 percent. It appears that the excessive inventory build in the first quarter was substantially resolved in the second quarter.

INFLATION
The net percent of owners raising average selling prices fell 1 point to a net 16 percent, seasonally adjusted. Unadjusted, 8 percent (unchanged) reported lower average selling prices and 25 percent (down 2 points) reported higher average prices. Price hikes were most frequent in the wholesale trades (13 percent lower, 26 higher), retail trades (8 lower, 31 higher), agriculture (17 lower, 27 percent higher) and construction (7 percent lower, 32 higher), segments of the economy that are likely to be feeling the impact of tariffs. Seasonally adjusted, a net 22 percent plan price hikes (down 1 point).

COMPENSATION AND EARNINGS
Reports of higher worker compensation rose 4 points to a net 32 percent of all firms. Plans to raise compensation fell 4 points to a net 17 percent, foreshadowing a slowdown in unit labor cost increases. The frequency of reports of positive profit trends rose 3 points to a net negative 4 percent reporting quarter on quarter profit improvements. Thirty-one percent of those reporting weaker profits blamed sales (up 4 points), 14 percent blamed labor costs (up 2 points), and 10 percent cited lower selling prices (up 1 point). For those reporting higher profits, 57 percent credited sales volumes (down 10 points). Seven percent credited higher selling prices. The balance of responses for those with higher and lower profits blame “usual seasonal change.”

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically very low. Twenty-eight percent reported all credit needs met (down 1 point) and 56 percent said they were not interested in a loan, up 1 point. Two percent reported their last loan was harder to get than the previous one, one point above the record low. The percent of owners reporting paying a higher rate on their most recent loan was 8 percent, down 2 points. Twenty-nine percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans fell 40 basis points to 6.4 percent. Credit conditions are about as supportive as they have ever been in the 46-year survey history.

COMMENTARY

The small business sector continues to defy expectations with another exceptional month of strong optimism. Small business owners continue to grow their business, creating value, and driving GDP forward. The major headwind facing them is a tight labor market. Attracting more people into the labor force from the sidelines would propel the small business sector even further.

The Federal Reserve Bank of the United States caved to Wall Street and delivered the quarter point cut that the market had “priced in,” meaning the rate cut was needed for the “bets” made by Wall Street to pay off. This will inflate the stock market, creating even more “wealth” that will buy less and less per dollar because output has not grown nearly as fast as wealth (claims on that output).

The impact of any quarter point reduction in borrowing costs will be negligible. Small business owners were asked in the July survey if a 100- basis point reduction in borrowing costs would change their capital spending plans over the next 12 months. Twelve percent said “yes” and 21 percent said “no.” Twenty-four percent were not sure and 43 percent were not planning on borrowing money. But Optimism is in the “stratosphere,” sales and profits look good, job openings go unfilled, so a 1 percentage point reduction in the cost of capital is a “biggie.” A quarter point – not so much. And when the economic outlook deteriorates at some future date, the Fed will have little room to spark spending. Future quarter point cuts will have greatly diminished impacts on spending and inflation. The Fed is dribbling away its “ammo” as we head to the 0 lower bound.

Owners have now received a surprise. Over 80 percent of borrowing firms expected credit conditions to stay the same or get tighter. Only 4 percent expected easier credit conditions, while 18 percent expected tighter conditions and 14 percent were undecided. Now owners will have to rethink the economic landscape. Along the way, savers are once again lined up to take it on the chin as deposit rates will fall as the Fed cuts.

The Federal Reserve also suspended the remaining months of portfolio reduction, so now as their portfolio matures, they must reinvest the proceeds in more bonds. This means bond demand is stronger and interest rates are pushed lower than otherwise would be the case. The U.S. will enter the next recession with $4 trillion in the Fed’s portfolio and come out of recession with $8-$10 trillion in Fed assets, too large to “normalize.” New monetary policy theories will be devised to rationalize it.






Posted: August 13, 2019 Tuesday 07:00 AM




Tags - Research
ADP EMPLOYMENT
BEIGE BOOK
BUSINESS BAROMETER
BUSINESS INVENTORIES
CASE-SHILLER
CHALLENGER LAYOFFS
CHICAGO FED MIDWEST MFG
CHICAGO FED NATL ACTIVITY
CHICAGO PMI
CONSTRUCTION SPENDING
CONSUMER CONFIDENCE
CONSUMER CREDIT
CPI
CURRENT ACCOUNT
DURABLE GOODS
EMPLOYMENT COST INDEX
EMPLOYMENT TRENDS INDEX
EXISTING HOME SALES
FACTORY ORDERS
FOMC STMT
FOMC
GDP
HELP WANTED HWOL
HOUSING STARTS
ICSC CHAIN STORE
IMPORT PRICE INDEX
INDUSTRIAL PRODUCTION
INTERNATIONAL TRADE
ISM MFG
ISM NON-MFG
JOB OPENINGS
JOBLESS CLAIMS
KANSAS CITY FED MFG
LEADING INDEX
MASS LAYOFFS
MICH CONSUMER CONFIDENCE
MORTGAGE APPS
NAHB INDEX
NAPM-NY
NBER
NEW HOME SALES
NEW YORK FED MFG
NFIB OPTIMISM INDEX
NONFARM EMPLOYMENT
PAYCHEX-IHS SMALL JOBS
PENDING HOME SALES
PERSONAL INCOME
PHILA FED FORECASTERS
PHILA FED MFG
PHILA FED NON-MFG
PPI
PRODUCTIVITY GROWTH
REAL HOURLY EARNINGS
RETAIL SALES
RICHMOND FED MFG
TEXAS FED MFG
TREASURY INTL CAPITAL
WHOLESALE INVENTORIES
Archives
Oct 2020
Sep 2020
Aug 2020
Jul 2020
Jun 2020
May 2020
Apr 2020
Mar 2020
Feb 2020
Jan 2020
Dec 2019
Nov 2019
Oct 2019
Sep 2019
Aug 2019
Jul 2019
Jun 2019
May 2019
Apr 2019
Mar 2019
Feb 2019
Jan 2019
Dec 2018
Nov 2018
Oct 2018
Sep 2018
Aug 2018
Jul 2018
Jun 2018
May 2018
Apr 2018
Mar 2018
Feb 2018
Jan 2018
Dec 2017
Nov 2017
Oct 2017
Sep 2017
Aug 2017
Jul 2017
Jun 2017
May 2017
Apr 2017
Mar 2017
Feb 2017
Jan 2017
Dec 2016
Nov 2016
Oct 2016
Sep 2016
Aug 2016
Jul 2016
Jun 2016
May 2016
Apr 2016
Mar 2016
Feb 2016
Jan 2016
Dec 2015
Nov 2015
Oct 2015
Sep 2015
Aug 2015
Jul 2015
Jun 2015
May 2015
Apr 2015
Mar 2015
Feb 2015
Jan 2015
Dec 2014
Nov 2014
Oct 2014
Sep 2014
Aug 2014
Jul 2014
Jun 2014
May 2014
Apr 2014
Mar 2014
Feb 2014
Jan 2014
Dec 2013
Nov 2013
Oct 2013
Sep 2013
Aug 2013
Jul 2013
Jun 2013
May 2013
Apr 2013
Mar 2013
Feb 2013
Jan 2013
Dec 2012
Nov 2012
Oct 2012
Sep 2012
Aug 2012
Jul 2012
Jun 2012
May 2012
Apr 2012
Mar 2012
Feb 2012
Jan 2012
Dec 2011
Nov 2011
Oct 2011
Sep 2011
Aug 2011
Jul 2011
Jun 2011
May 2011
Apr 2011
Mar 2011
Feb 2011
Jan 2011
Dec 2010
Nov 2010
Oct 2010
Sep 2010
Aug 2010
Jul 2010
Jun 2010
May 2010
Apr 2010
Mar 2010
Feb 2010
Jan 2010
Dec 2009
Nov 2009
Oct 2009
Sep 2009
Aug 2009
Jul 2009
Jun 2009
May 2009
Apr 2009
Mar 2009
Feb 2009
Jan 2009
Dec 2008
Nov 2008
Oct 2008
Sep 2008
Aug 2008




Buy Economic Books at

The OneWall.com Book Shop

Quick Links
Barron's Online
Bloomberg
CNBC
CNBC TV Live
CNet Investor
Financial Times (UK)
Forbes
Kudlow Podcast
MSNBC TV Live
NBC News
NY Times
The Economist
TheStreet.com
Wall St Journal
Dismal Scientist
Dr. Ed Yardeni
FRED Graph
Lawrence Kudlow
Stone McCarthy
GDPNow
NABE
ABC News
CNNfn
Institutional Investor
MarketWatch
Cash Prices - WSJ.com
Dr. Jeremy Siegel
Market Map
NY RBOB Gas
Shadow Fed - SOMC
BankStocks.com
Dow Jones Indices
Morningstar
SP Indices
Mt Washington Observatory
Weather.com
Yahoo!!




National Association for Business Economics
NABE

Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works.

CFA Institute

The Financial Crisis Inquiry Commission was created to examine the causes, domestic and global, of the current financial and economic crisis in the United States.

The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform