NFIB November 2016 Report: Outlook for business conditions up substantially
The Index of Small Business Optimism rose 3.5 points to 98.4, a substantial gain to just above the 42-year average of 98. Eight of the 10 Index components posted a gain, one declined and one was unchanged. Expectations for real sales gains and outlook for business conditions accounted for 69 percent of the gain. The two employment components added 20 percent of the gain. The remaining six components were little changed.
LABOR MARKETS
Reported job creation remained weak in November with the seasonally adjusted average employment change per firm posting a gain of 0.02 workers per firm, positive, but barely. Fifty-eight percent reported hiring or trying to hire (up 3 points), but 52 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent of owners cited the difficulty of finding qualified workers as their ‘Single Most Important Business Problem’.
Thirty-one percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading in this recovery. The increase accurately predicted the decline in the unemployment rate from what many already call a “full employment” level. Sixteen percent reported using temporary workers, up 1 point. A seasonally adjusted net 15 percent plan to create new jobs, up 5 points from October and the strongest reading in the recovery.
INVENTORIES AND SALES
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months deteriorated 1 percentage point to a net negative 8 percent. Reports of stronger consumer spending in the government numbers did not improve reports of sales gains.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 10 points to a net 11 percent of owners, a strong showing, but still historically quite weak. The net percent of owners reporting inventory gains was unchanged at a net negative 3 percent (seasonally adjusted), typical of reports for 15 of the last 16 months.
The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 4 percent. With weak sales expectations, current inventory stocks appear more than adequate. Still, the net percent of owners planning to add to inventory improved 2 points to a net 4 percent, perhaps reflecting strong demand in some regions of the country
CAPITAL SPENDING
Fifty-five percent reported capital outlays, down 2 points from October and trending down on a quarterly basis.
The percentage of owners making an outlay peaked for this recovery in July 2015 at 61 percent, revisited that percentage in January but has faded since. The percent of owners planning capital outlays in the next 3 to 6 months fell 3 points to 24 percent. The small business sector remains in “maintenance mode”. However, there was a substantial shift in expectations in the post-election data. Seasonally adjusted, the net percent expecting better business conditions rose 19 percentage points to a net 12 percent. Expectations for economic improvement and sales growth made significant gains, but plans for capital spending did not follow, declining after the election. It will take a “cooling off” period and some additional evidence on the economy to induce owners to convert their optimism into spending.
INFLATION
The net percent of owners raising average selling prices was a net 5 percent (up 3 points), this is in contrast to a net 70 percent raising average prices in the 1970s. Clearly the small business sector can produce “inflation” given the opportunity to raise prices – strong growth in demand. Twelve percent of owners reported reducing their average selling prices in the past three months (down 1 point), and 14 percent reported price increases (up 1 point). Seasonally adjusted, a net 19 percent plan price hikes (up 4 points).
EARNINGS AND WAGES
A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 4 points. The net percent planning to increase compensation dropped 4 points to 15 percent. The strongest reading in this recovery occurred in January with a net 27 percent reporting higher employee compensation. The lowest was a net negative 2 percent in 2009. The percent of owners citing the difficulty of finding qualified workers as their Most Important Business Problem rose 1 point to 16 percent. Earnings trends improved 1 point to a net negative 20 percent reporting quarter on quarter profit improvements. The inability of firms to raise prices limits the extent to which firms can raise worker compensation as they face shortages of some types of labor.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, unchanged from October. Thirty percent reported all credit needs met (up 1 point), and 52 percent explicitly said they did not want a loan, down 1 point. Only 2 percent reported that financing was their top business problem. Thirty-one percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 40 basis points to 5.6 percent. Overall, loan demand remains historically weak, owners can’t find many good reasons to borrow and invest, even with abundantly cheap money.
COMMENTARY
Many promises were made in the heat of the election, but delivering will, as always, be a challenge. Counting the Obamacare as a “regulation”, the roll back of the oppressive regulations including the EPA, OSHA, FLRB and the DOL are at the top of small business owner lists of concerns. Counting the Obamacare as a “tax”, tax issues account for six of the top ten owner concerns in NFIB’s 2016 Small Business Problems and Priorities survey. The 10th ranked problem was the shortage of “qualified labor”.
Federal Reserve policy might be impacted by the appointment of two new Governors of the Federal Reserve System. This could change the current hawks to doves voting balance on the FOMC. But new nominees must be approved by the Senate, so that is more likely to occur in the second half of 2017. Which of the current Governors choose to remain and serve out their terms remains to be seen. Any departures provide additional opportunities to change the composition of the FOMC which determines monetary policy. In the meantime, the Federal Reserve will raise rates in December.
The question as to whether or not uncertainty, and political uncertainty in particular, matters was clearly answered by the November survey – it does! Owners clearly expect a different, and better from their perspective, set of economic policies to help the economy shed the growing number of obstacles of the last eight years in tax and regulatory policies that have depressed growth. This economy has grown in spite of, not because of, Obama’s economic policies. Population growth explains most, if not all, of our progress. The prospective impact of expected policy changes was translated into very positive views of economic activity which will translate into more spending and hiring if maintained.
Bill Dunkelberg is Chief Economist for the National Federation of Independent Business
