July 2019 Report: Small Business Optimism Continues to Defy Expectations
The Uncertainty Index fell 10 points, reversing a surge in June that reached the highest level since March 2017.
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.
