October 2020 Report: Small Business Optimism Remains Steady in October, but Owners’ Uncertainty Increased
The economy continues to recover from the 31 percent plunge in GDP in the second quarter, and a solid 4th quarter could restore levels to the peak levels reached in 2019.
The NFIB Optimism Index remained at 104.0 in October, unchanged from September and a historically high reading. Four of the 10 components improved, 5 declined, and 1 was unchanged. Although all of the data was collected prior to Election Day, a 6-point increase in the NFIB Uncertainty Index to 98 was likely driven by the election and uncertain conditions in future months due to the COVID-19 pandemic and possible government mandated shutdowns. The uncertainty reading was the highest reading since November 2016.
“Leading up to the presidential election, small businesses continued to focus on stabilizing their businesses but were uncertain about the future economic conditions due to COVID-19 government regulations on all levels,” said NFIB Chief Economist Bill Dunkelberg. “We see solid momentum going into the 4th quarter, and another good quarter could get the GDP back to its 2019 closing levels.”
Other key findings include:
- Earnings trends over the past three months improved 9 points to a net negative 3% reporting higher earnings.
- Earnings trends have improved to pre-crisis levels, up 32 points since June.
- Inventory investment plans for the next three to six months increased 1 point to a net 12%, a record high.
- Real sales expectations in the next three months increased 3 points to a net 11% expecting gains.
- Owners expecting better business conditions over the next six months declined 5 points to a net 27%.
As reported in NFIB’s monthly jobs report, small business owners are looking to hire, reporting a historically high level of job openings in October. Overall, 55% of owners reported hiring or trying to hire in October, down 1 point from September. Thirty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 3 points from September’s report.
Unchanged from last month, a net 23% (seasonally adjusted) reported raising compensation and a net 18% plan to do so in the coming months, up 2 points. Eight percent cited labor costs as their top business problem (down 1 point) but 22% said that labor quality was their top business problem, exceeding taxes, regulations, and weak sales. Thirty-five percent in construction report finding qualified workers as their top issue, slowing new home production.
Fifty-three percent of owners reported capital outlays in the last six months, unchanged from September. Historically, this is a poor performance because it doesn’t boost current GDP and it impairs the future growth in worker productivity and pay.
Of those making expenditures, 36% of owners reported spending on new equipment (down 2 points), 20% acquired vehicles (down 3 points), and 16% improved or expanded facilities (unchanged). Five percent acquired new buildings and land for expansion (up 1 point), and 12% spent money for new fixtures and furniture (up 4 points). Twenty-seven percent plan capital outlays in the next few months, down 1 point from September.
Small businesses have continued to see improvements in foot traffic and sales with a net 6% of all owners (seasonally adjusted) reporting higher nominal sales in the past three months, an improvement of 12 points from September. The net percent of owners expecting higher real sales volumes increased 3 points to a net 11% of owners.
The net percent of owners reporting inventory increases rose 2 points to a net negative 5%. Consequently, the net percent of owners viewing current inventory stocks as “too low” remained at record levels, falling only 1 point to 4%. The net percent of owners planning to expand inventory holdings increased from September by 1 point to a net 12%, a record high. Inventories continue to be low and are being rebuilt as supply chains are restored.
Seasonally adjusted, the net percent of owners raising average selling prices rose 2 points to a net 15%. Unadjusted, 10% (down 1 point) reported lower average selling prices, and 23% (unchanged) reported higher average prices. Price hikes were the most frequent in retail (26% higher, 7% lower) and wholesale (21% higher, 13% lower). Seasonally adjusted, a net 20% plan price hikes (up 3 points). The frequency of average price increases above 10% remained high.
The frequency of positive profit trends rose 9 points to a net negative 3% reporting quarter on quarter profit improvement. Among owners with weaker profits, 52% blamed weak sales, 8% cited usual seasonal change, 7% cited labor costs, and 6% cited lower prices. For owners reporting higher profits, 70% credited sales volumes and 10% cited usual seasonal change.
Three percent of owners reported that all of their borrowing needs were not satisfied (up 1 point), 29% reported all credit needs were met (down 4 points), and 56% said they were not interested in a loan (up 1 point). A net 3% reported their last loan was harder to get than in previous attempts (up 1 point).
Only one percent of owners reported that financing was their top business problem, unchanged from last month. The net percent of owners reporting paying a higher rate on their most recent loan was negative 6%, up 4 points from September, indicating that borrowers are seeing the benefits of low interest rates being passed along in the form of lower loan rates. Twenty-five percent of all owners reported borrowing on a regular basis (up 1 point).
LABOR MARKETS
Small businesses are looking to hire as they reported a historically high level of job openings in October. Thirty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 3 points from September (charts only show data points for surveys in the first month of each quarter). Twenty-nine percent have openings for skilled workers (down 3 points) and 14 percent have openings for unskilled labor (down 2 points). Firms increased employment by 0.1 workers per firm on average over the past few months, an increase of 0.09 workers per firm from September. Eleven percent (up 1 point) reported increasing employment an average of 3.0 workers per firm and 14 percent (down 2 points) reported reducing employment an average of 3.8 workers per firm (seasonally adjusted). Owners plan to fill those positions, with a seasonally-adjusted net 18 percent planning to create new jobs in the next three months, down 5 points from September but historically a very strong reading and a clear recovery from the April collapse of the economy due to government mandated stay-at-home orders and nonessential businesses closures. Forty-eight percent (87 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. Twenty-eight percent of owners reported few qualified applicants for their open positions (down 2 points) and 20 percent reported none (unchanged). Overall, 55 percent reported hiring or trying to hire in October, down 1 point from the previous month.
CAPITAL SPENDING
Fifty-three percent reported capital outlays in the last six months, unchanged from September. Of those making expenditures, 36 percent reported spending on new equipment (down 2 points), 20 percent acquired vehicles (down 3 points), and 16 percent improved or expanded facilities (unchanged). Five percent acquired new buildings or land for expansion (up 1 point), and 12 percent spent money for new fixtures and furniture (up 4 points). Twenty-seven percent plan capital outlays in the next few months, down 1 point from September.
COMPENSATION AND EARNINGS
Seasonally adjusted, a net 23 percent reported raising compensation (unchanged) and a net 18 percent plan to do so in the coming months, up two points. Eight percent cited labor costs as their top business problem (down 1 point) but 22 percent said that labor quality was their top business problem, exceeding taxes, regulations, and weak sales. The frequency of reports of positive profit trends rose 9 points to a net negative 3 percent reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 52 percent blamed weak sales, 8 percent cited usual seasonal change, 7 percent cited labor costs, and 6 percent cited lower prices. For owners reporting higher profits, 70 percent credited sales volumes and 10 percent cited usual seasonal change.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-nine percent reported all credit needs met (down 4 points) and 56 percent said they were not interested in a loan (up 1 point). A net 3 percent reported their last loan was harder to get than in previous attempts (up 1 point). Credit markets have never been friendlier, and the Federal Reserve promises that will continue indefinitely. One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 6 percent, up 4 points from September. Twenty-five percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans was 4.9 percent, down 0.2 points from September. Loan rates have never been so consistently low.
SALES AND INVENTORIES
As parts of the economy continue to open, small businesses continue to see improvements in foot traffic and sales. A net 6 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, an improvement of 12 points from September. The net percent of owners expecting higher real sales volumes increased 3 points to a net 11 percent of owners, a strong recovery from the April crash. The net percent of owners reporting inventory increases rose 2 points to a net negative 5 percent, substantially more firms report falling inventories than see stocks building. The major cause of this is the strong recovery of sales and the inability to receive new deliveries of inventories due to supply chain problems. Consequently, the net percent of owners viewing current inventory stocks as “too low” remained at record levels, falling only 1 point to 4 percent. The net percent of owners planning to expand inventory holdings increased from September by 1 point to a net 12 percent, a record high.
INFLATION
The net percent of owners raising average selling prices rose 2 points to a net 15 percent, seasonally adjusted. Unadjusted, 10 percent (down 1 point) reported lower average selling prices and 23 percent (unchanged) reported higher average prices. Price hikes were most frequent in retail (26 percent higher, 7 percent lower) and wholesale (21 percent higher, 13 percent lower). Seasonally adjusted, a net 20 percent plan price hikes (up 3 points). The frequency of average price increases above 10 percent remained high.
COMMENTARY
The Presidential election is now over, it was much closer than the polls and media were reporting prior to November. Stock markets continue to perform well and reports on the economy were blockbuster numbers, 33 percent growth in GDP in Q3, minimal inflation, and historically low interest rates. The economy continues to recover from the 31 percent plunge in GDP in the second quarter, and a solid 4th quarter could restore levels to the peak levels reached in 2019.
As Washington reorganizes for the next four years, the top policy issue will remain Covid-19. Shutting down the economy to contain the virus proved to be very costly causing the second quarter crash in the economy and sending the unemployment rate to record high levels. For small business owners, sales plunged. Dominating the service sector, the reduction in foot traffic business evaporated for all businesses that had direct contact with customers to provide service (travel, restaurants, gyms, retail, barbers and salons, etc.). Sales disappeared but costs did not, so profits posted record declines.
Congress responded quickly with a stimulus package which included checks for $1,200 mailed directly to consumers and $600/week supplements to unemployment benefits and the PPP lending/grant program for small firms. Spending went up and some industries (manufacturing, construction and transportation) were not heavily impacted by the shutdown. Various state and local governments imposed or relaxed their own virus management policies, in general opening up a lot of the economy to commerce. A good 4th quarter could get the economy back to its 2019 closing levels.
Momentum going into the 4th quarter is quite strong. The inventory build alone could add several percentage points to the growth rate. The Federal Reserve is on board with monetary stimulus. Even if a stimulus package is passed after the election, it is unlikely to have a major impact on the 4th quarter results, most likely impacting in the 1st quarter of 2021. Consumer spending will be the main workhorse for the rest of this year.
