August 2020 Report: Small Business Optimism Rebounds, Exceeding Historical Average
The economy fell so far in April that any increase in activity, expressed as a percentage of the prior periods, looks a lot better.
The NFIB Optimism Index increased 1.4 points in August to 100.2, a reading slightly above the historical 46-year average. Seven of the 10 Index components improved, two declined, and one was unchanged. The NFIB Uncertainty Index increased two points in August to 90, the second-highest reading since 2017.
“Small businesses are working hard to recover from the state shutdowns and effects of COVID-19,” said NFIB Chief Economist Bill Dunkelberg. “We are seeing areas of improvement in the small business economy, as job openings and plans to hire are increasing, but many small businesses are still struggling and are uncertain about what the future will hold.”
The NFIB Uncertainty Index rose two points in August to 90, the second-highest reading since March 2017. The record reading of 100 was reached in November 2016.
Other key findings include:
- Earnings trends over the past three months improved seven points to a net negative 25% reporting higher earnings.
- Job openings increased three points to 33% of firms with at least one unfilled position.
- The percent of owners thinking it’s a good time to expand increased one point to 12%.
- Real sales expectations in the next three months decreased two points to a net 3%.
As reported in NFIB’s monthly jobs report, job creation plans increased three points to a net 21%, an unprecedented recovery from April’s reading of 1%. Construction job growth continues to be strong but owners in the sector are having a particularly hard time finding skilled employees. The manufacturing sector’s employment remained strong but not as strong as seen in previous months. The service sector is the missing link and the key to stronger job growth going forward.
Forty-seven percent of owners reported capital outlays in the last six months, down 2 points from July and 16 points below January’s level. The low levels of investment are contributing to low GDP growth. Twenty-six percent plan capital outlays in the next few months, unchanged from July’s reading.
Of those making expenditures, 34% reported spending on new equipment, 21% acquired vehicles, and 12% improved or expanded facilities. Six percent acquired new buildings or land for expansion and 9% spent money for new fixtures and furniture.
A net negative 15% of all owners reported higher nominal sales in the past three months, up 13 points from July. The net percent of owners expecting higher real sales volumes decreased 2 points to a net 3% of owners.
The net percent of owners reporting inventory increases improved two points to a net negative 9%. It’s hard to reduce inventory for small businesses when there are few or no customers. The net percent of owners viewing current inventory stocks as “too low” increased two points to 3%. The net percent of owners planning to expand inventory holdings increased from July by two points to a net 6%.
The net percent of owners raising average selling prices rose three points to a net 1% seasonally adjusted. Sixteen percent reported lower average selling prices and 16% reported higher average prices.
Price hikes were the most frequent in wholesale (24% higher, 22% lower). Price cuts were the most frequent in retail (11% higher, 24% lower). Seasonally adjusted, a net 16% plan price hikes.
Seasonally adjusted, a net 18% reported raising compensation. The percent of owners raising compensation remains well below the 36% reading in February before COVID-19 policies were implemented. A net 14% plan to do so in the coming months and 9% cited labor costs as their top problem.
Twenty-one percent of owners selected “finding qualified labor” as their top business problem, with 41% in construction where the unavailability of qualified workers is slowing new home production.
The frequency of reports of positive profit trends rose 7 points to a net negative 25% reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 55% blamed weak sales, 8% cited price changes, 4% cited material costs, and 3% cited labor costs. For owners reporting higher profits, 65% credited sales volumes.
Three percent of owners reported that all their borrowing needs were not satisfied. Thirty-one percent reported all credit needs were met and 53% said they were not interested in a loan. A net 1% reported their last loan was harder to get than in previous attempts.
Two percent of owners reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was negative 5%.
LABOR MARKETS
Firms increased employment by 0.02 workers per firm on average over the past few months. Eight percent (up 1 point) reported increasing employment an average of 4.5 workers per firm and 20 percent (up 2 points) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted). Even though more employees are being added, total non-farm employment will remain about 8 percent below its February peak. A seasonally-adjusted net 21 percent plan to create new jobs in the next three months, up 3 points from July, and 20 percentage points above April, an unprecedented recovery. Construction job growth continues to be strong but owners in the sector are having a particularly hard time finding skilled employees. The employment picture for manufacturing remained strong but not as good as the previous month. The service sector remains the missing link and is the key to stronger job growth going forward. Thirty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 3 points. Thirty-one percent have openings for skilled workers (up 4 points) and 12 percent have openings for unskilled labor (up 1 point). Twenty-six percent of owners reported few qualified applicants for their open positions (up 1 point) and 20 percent reported none (up 1 point).
CAPITAL SPENDING
Forty-seven percent reported capital outlays in the last 6 months, down 2 points from July. Capital expenditures are 16 points below January’s level. These low levels of investment are contributing to low GDP growth and will retard productivity improvements over the next year. Of those making expenditures, 34 percent reported spending on new equipment (up 1 point), 21 percent acquired vehicles (unchanged), and 12 percent improved or expanded facilities (down 1 point). Six percent acquired new buildings or land for expansion (up 1 point), and 9 percent spent money for new fixtures and furniture (down 1 point). Twenty-six percent plan capital outlays in the next few months, unchanged from July. The enemy of investment is uncertainty about sales, regulations, Covid-19, elections, and more. The Uncertainty Index rose 2 more points in August to 90, the second highest reading since March 2017. As uncertainties are resolved, and the future becomes clearer (good or bad), firms will revisit capital spending plans.
COMPENSATION AND EARNINGS
Seasonally adjusted, a net 18 percent reported raising compensation (up 3 points). The percentage of owners raising compensation remains well below the 36 percent reading in February before COVID-19 policies were implemented in March. A net 14 percent plan to do so in the coming months, unchanged from July. Nine percent cited labor costs as their top problem, up 1 point from July. Twenty-one percent of the owners selected “finding qualified labor” as their top business problem. The frequency of reports of positive profit trends rose 7 points to a net negative 25 percent reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 55 percent blamed weak sales, 8 percent cited price changes, 4 percent cited materials costs, and 3 percent cited labor costs. The main factor driving profits is sales, where prospects are not good for the balance of the year in the current environment.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (unchanged). Thirty-one percent reported all credit needs met (down 4 points) and 53 percent said they were not interested in a loan (up 2 points). A net 1 percent reported their last loan was harder to get than in previous attempts (down 1 point). Two percent reported that financing was their top business problem (up 1 point). The net percent of owners reporting paying a higher rate on their most recent loan was negative 5 percent, up 4 points from July. Twenty-four percent of all owners reported borrowing on a regular basis (down 2 point). The average rate paid on short maturity loans was up 0.7 points at 4.8 percent.
SALES AND INVENTORIES
A net negative 15 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 13 points from July. The net percent of owners expecting higher real sales volumes decreased 2 points to a net 3 percent of owners. Owners do not see an economy-wide sales gain that would push the net percent with sales growth into positive territory.
The net percent of owners reporting inventory increases improved 2 points to a net negative 9 percent. It’s hard to reduce inventory when there are few or no customers in the store. Existing inventories are sold off slowly and little new inventory is ordered to meet a demand suppressed by operating restrictions. The net percent of owners viewing current inventory stocks as “too low” increased 2 points to 3 percent. The net percent of owners planning to expand inventory holdings increased from July by 2 points to a net 6 percent.
INFLATION
The net percent of owners raising average selling prices rose 3 points to a net 1 percent, seasonally adjusted. Unadjusted, 16 percent (unchanged) reported lower average selling prices and 16 percent (up 1 point) reported higher average prices. Seasonally adjusted, a net 16 percent plan price hikes (up 3 points). Bottom line, no inflation on Main Street for the Federal Reserve to worry about.
COMMENTARY
The economy fell so far in April that any increase in activity, expressed as a percentage of the prior periods, looks a lot better. For example, motor vehicles and parts production rose almost 500% over the past three months, which got output back to pre-Covidlevels. Production of computers and electronic did almost as well. Although 8% below February levels, overall production increased a solid 10% over the past three months. Consumption of goods increased faster than production, resulting in a huge decline in inventories (negative investment) which reduced the GDP growth rate by 4 percentage points. Small business owners noticed and are leading the way with plans to spend more.
Retail sales were up but the performance was uneven. Sales at restaurants and bars rose, but remain 20% below February levels. The same holds for sales at clothing and accessories stores. Spending at home repair and garden stores surged in May and June but flattened in July. The consumption of goods already exceeds pre-pandemic levels, but services expenditures are lagging, leaving total consumption below February levels.
From this point, the good news is growth percentages will be solid in terms of percentages and in real terms as well. Consumer spending will continue, but with no new federal support, spending will slow. Consumers sentiment is not heavily supportive. Housing is on a roll and will continue its current performance. Service sector indicators indicate slower gains because the rush to “open up” has been blunted by the Covid-19 resurgence. More small businesses opening up larger states will cause these numbers to improve.
