January 2020 Report: Small Business Optimism Starts New Year as Solid as Ever
January's Index is in the top 10 percent of all readings in the 46-year history of the survey.
The small business Optimism Index started the New Year in the top 10% of all readings in the 46-year history of the survey, rising 1.6 points to 104.3 in the month of January. Six of the 10 Index components improved, two declined, and two were unchanged, with the Uncertainty Index edging up slightly. Owners expecting better business conditions dipped slightly, but sales expectations and earnings trends improved significantly. As was reported last week, actual job creation surged in January.
“2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.”
The net percent of owners expecting higher real sales volumes increased 7 points to 23 percent with owners a bit more certain of future sales growth prospects. A net 7% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from December.
The NFIB Uncertainty Index moved up 1 point from December to 81, but well below the spike to 86 seen in last January’s Index, following the government shutdown. A net 14% of owners expect better business conditions.
The frequency of reports of positive profit trends reversed half of December’s decline, increasing 5 points in January. Thirty-three percent of those reporting weaker profits blamed weak sales, 27 percent blamed usual seasonal change, and 8 percent cited labor costs, 6 percent cited materials costs, and 4 percent cited price changes. For those reporting higher profits, 61 percent credited sales volumes. 17 percent credited usual seasonal change.
As reported in last week’s NFIB’s monthly jobs report, new job creation jumped in January, with an average addition of 0.49 workers per firm, the highest level since March 2019. Twenty-six percent of owners reported finding qualified workers as their number one problem, 1 point below August’s record high. Fifty-six percent reported hiring or trying to hire (up 3 points), but 49 percent reported few or no “qualified” applicants for the positions they were trying to fill.
Historically high percentages of owners plan to raise worker compensation, as they seek to fill open positions. Seasonally adjusted, a net 36 percent reported raising compensation (up 7 points) and a net 24 percent plan to do so in the coming months, unchanged from December. Eight percent cited labor costs as their top problem.
“Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”
The net percent of owners raising average selling prices rose 1 point to a net 15 percent, seasonally adjusted, continuing a measured upward trend since September. Price hikes were most frequent in retail (24 percent higher, 6 percent lower) and wholesale (20 percent higher, 8 percent lower). Seasonally adjusted, a net 24 percent plan price hikes (up 4 points).
LABOR MARKETS
New job creation jumped in January, with an average addition of 0.49 workers per firm, the highest level since March 2019, rebounding back into strong territory. Finding qualified workers remains the top issue for 26 percent reporting this as their number one problem, 1 point below August’s record high. Thirteen percent (up 2 points) reported increasing employment an average of 2.8 workers per firm and 4 percent (unchanged) reported reducing employment an average of 2.8 workers per firm (seasonally adjusted). Fifty-six percent reported hiring or trying to hire (up 3 points), but 49 percent reported few or no “qualified” applicants for the positions they were trying to fill.
A seasonally-adjusted net 19 percent plan to create new jobs, unchanged. Not seasonally adjusted, 24 percent plan to increase total employment at their firm (up 5 points), and 3 percent plan reductions (down 2 points). Thirty percent have openings for skilled workers (up 3 points) and 14 percent have openings for unskilled labor (up 1 points). Twenty-nine percent of owners reported few qualified applicants for their open positions (up 1 point) and 20 percent reported none (down 2 points). Attempting to fill open positions, historically high percentages of owners plan to raise worker compensation. Seasonally adjusted, a net 36 percent reported raising compensation (up 7 points) and a net 24 percent plan to do so in the coming months, unchanged. Eight percent cited labor costs as their top problem.
CAPITAL SPENDING
Sixty-three percent reported capital outlays, unchanged from December’s reading. Of those making expenditures, 45 percent reported spending on new equipment (up 2 points), 27 percent acquired vehicles (up 2 points), and 17 percent improved or expanded facilities (down 1 point). Eight percent acquired new buildings or land for expansion (up 1 point), and 14 percent spent money for new fixtures and furniture (up 1 point). Twenty-eight percent plan capital outlays in the next few months, unchanged from December.
SALES AND INVENTORIES
A net 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from December. The net percent of owners expecting higher real sales volumes increased 7 points to a net 23 percent of owners. Actual sales volumes are strong, and owners are a bit more certain of future sales growth.
The net percent of owners reporting inventory increases rose 4 points from December’s reading to a net 6 percent. The net percent of owners viewing current inventory stocks as “too low” increased to negative 3 percent, a one point increase from December. The net percent of owners planning to expand inventory holdings increased from December by one point to a net 4 percent, a solid number. Overall, owners feel that the prospects for growth still justify adding to inventory stocks.
COMPENSATION AND EARNINGS
Attempting to fill open positions, historically high percentages of owners plan to raise worker compensation. Seasonally adjusted, a net 36 percent reported raising compensation (up 7 points) and a net 24 percent plan to do so in the coming months, unchanged from December. Eight percent cited labor costs as their top problem. Twentysix percent of the owners selected “finding qualified labor” as their top business problem. The frequency of reports of positive profit trends rose 5 points to a net negative 3 percent reporting quarter on quarter profit improvements, reversing the decline in December. Thirty-three percent of those reporting weaker profits blamed weak sales, 27 percent blamed usual seasonal change, and 8 percent cited labor costs, 6 percent cited materials costs, and 4 percent cited price changes. For those reporting higher profits, 61 percent credited sales volumes. 17 percent credited usual seasonal change.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and near a record low. Thirty percent reported all credit needs met (up 1 point) and 54 percent said they were not interested in a loan (down 2 points). Four percent reported their last loan was harder to get than in previous attempts, up 1 point and also near a record low. One percent reported that financing was their top business problem (down 1 point). The percent of owners reporting paying a higher rate on their most recent loan was 3 percent, down 2 points. Thirty-one percent of all owners reported borrowing on a regular basis (up 2 points). The average rate paid on short maturity loans fell 40 basis points to 6.0 percent.
INFLATION
The net percent of owners raising average selling prices rose 1 point to a net 15 percent, seasonally adjusted, continuing a measured upward trend since September. Unadjusted, 7 percent (down 3 points) reported lower average selling prices and 21 percent (up 1 point) reported higher average prices. Seasonally adjusted, a net 24 percent plan price hikes (up 4 points).
COMMENTARY
The 2020 small business sector is off to a strong start, continuing the longest economic recovery on record. Small business owners are confidently filling open positions, raising wages, and investing in their business. The current environment is a sharp departure from this time last year when the political disfunction in D.C. created the longest federal government shutdown in U.S. history. About 1/3 of small business owners were negatively impacted and the residual effects of slower payments and lost revenue, for many, lasted months after it ended. But despite the shutdown, recession mumblings, tariffs, and an impeachment, 2019 was still a strong year for small businesses and with most of those issues resolved or muted, 2020 is shaping up to outpace last year. The politicians are out on the campaign trail, debating the issues and promising solutions, often unaffordable, to problems small business owners know are usually best solved through a strong, stable economy. Wages continue to improve, workforce training enhanced, and job openings are still plentiful. Only a major unexpected event can disrupt the economy in the near term, otherwise there is no reason this expansion can’t continue, benefiting small business owners, employees, and consumers.
The current Index is in the top 10 percent of all readings in the 46-year history of the survey. A great position for current small business owners and those just getting their business off and running. U.S. GDP averaged a 2.3 percent growth rate in 2019. The unemployment rate remains historically low at 3.6 percent and the labor force participation rate ticked up over the last year 0.2 points, drawing more people off the sidelines with more attractive opportunities and compensation.
The biggest risk appears to be potential global implications of the Wuhan coronavirus. The Fed has said it’s monitoring the spread of the disease and its impact on China’s economy, deciding in March whether there’s a larger impact that deserves policy action. But if just evaluating the U.S. economy, risks to slower economic growth are low in near term. Small businesses owners remain highly optimistic on continued growth as strong policy fundamentals in D.C. remain supportive of Main Street.
