August 2019 Report: Small Business Economy Remains Steady, Despite Doom and Gloom Narrative That’s Hampering Expectations
The Uncertainty Index rose four points in August, suggesting that small business owners are reluctant to make major spending commitments. In fact, the main impediment to more growth is the record level of no qualified workers.
The NFIB Small Business Optimism Index fell 1.6 points to 103.1, remaining within the top 15 percent of readings. Overall, August was a good month for small business. However, optimism slipped because fewer owners said they expect better business conditions and real sales volumes in the coming months. Job creation accelerated, positive earnings trends improved, and quarter-on-quarter sales gains remained strong.
“In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country,” said NFIB President and CEO Juanita D. Duggan. “Small business owners continue to invest, grow, and hire at historically high levels, and we see no indication of a coming recession.”
The Uncertainty Index rose four points in August, suggesting that small business owners are reluctant to make major spending commitments. In fact, the main impediment to more growth is the record level of no qualified workers.
Capital spending posted strong improvements in August with 59 percent of owners reporting capital outlays, up two points from the month before. Of those making expenditures, 42 percent reported spending on new equipment, 24 percent acquired vehicles, and 18 percent improved or expanded facilities. Four percent acquired new buildings or land for expansion, while 15 percent spent money for new fixtures and furniture.
Twenty-eight percent are planning capital outlays in the next few months. Plans to invest were the strongest in manufacturing (35 percent), agriculture (30 percent), and wholesale trades (30 percent).
Owners raising average selling prices fell five points to a net 11 percent (seasonally adjusted), reversing July’s seven point surge. Price hikes were the most frequent in wholesale trades (14 percent lower, 30 percent higher), the sector most likely to feel the effects of tariffs.
Owners planning price hikes fell five points to a seasonally adjusted net 17 percent. Eleven percent reported cutting selling prices in recent months, and only two percent plan to do so. That suggests most price cutting is an unplanned response to market conditions, which is a healthy process. The frequency of reports of positive profit trends improved three points (after three points in July) to a net negative one percent reporting quarter on quarter profit improvements, the third highest reading in the survey’s history.
A seasonally adjusted six percent of all owners reported higher nominal sales in the past three months. Consumer spending remains exceptionally strong and consistent with small business owners’ reports of positive sales trends.
“The August report does not show a sign of inflation or reflect what the Fed has noted,” said NFIB Chief Economist William Dunkelberg. “The pessimism we’re seeing is contagious, even though the actual economy is thriving. Expectations can be infected and, as a result, could turn sour. All the talk about an impending recession can create a false reality, but it doesn’t make it right. Main Street is continuing to produce and remains strong in spite of the headlines.”
Falling one point from last month, a net one percent of owners reported inventory increases, indicating that inventory rebuilding is still underway although at a slower pace. The net percent of owners viewing current inventory stocks as “too low” fell three points to a net negative six percent. The net percent of owners planning to expand inventory holdings fell one point to a net two percent.
Owners reporting higher compensation fell three points to a net 29 percent of all firms. Plans to raise compensation rose two points to a net 19 percent.
As seen in NFIB’s August Jobs Report, a record 27 percent of owners reported finding qualified workers is their No. 1 business problem. Two percent reported that financing was their top business problem compared to 14 percent citing taxes, and 14 percent citing regulations and red tape.
LABOR MARKETS
Job creation picked up in August, with an average addition of 0.19 workers per firm compared to 0.12 in July. Finding qualified workers is becoming more and more difficult with a record 27 percent reporting finding qualified workers as their number one problem (up 1 point). Thirteen percent (up 3 points) reported increasing employment an average of 4 workers per firm and 6 percent (down 1 point) reported reducing employment an average of 3.9 workers per firm (seasonally adjusted). Sixty-four percent reported hiring or trying to hire (up 1 point), but 57 percent (89 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill. If the widely discussed slowdown occurs, a significant contributor will be the unavailability of labor–hard to call that a “recession” when job openings still exceed job searchers.
CAPITAL SPENDING
Fifty-nine percent reported capital outlays, up 2 points on top of a 3 point gain in July. Of those making expenditures, 42 percent reported spending on new equipment (up 1 point), 24 percent acquired vehicles (down 1 point), and 18 percent improved or expanded facilities (up 2 points after a 4 point gain in July). Four percent acquired new buildings or land for expansion (down 2 points) and 15 percent spent money for new fixtures and furniture (up 3 points).
Twenty-eight percent plan capital outlays in the next few months, up 1 point. Plans to invest were strong in manufacturing, 35 percent and agriculture and the wholesale trades each at 30 percent. The effects of the new tariff wars remain uncertain. Owners are more reluctant to make major spending commitments when the future becomes less certain so the increase is not supportive of future capital investment.
SALES AND INVENTORIES
A net 6 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months. Although consumer optimism fell last month, consumer spending has been exceptionally strong and consistent with owner reports of positive sales trends.
The net percent of owners reporting inventory increases fell 1 point to a net 1 percent, indicating that inventory rebuilding is still underway, although at a slower pace. The contribution of inventory investment to GDP growth will likely be positive but modest in the third quarter. The net percent of owners viewing current inventory stocks as “too low” fell 3 points to a net negative 6 percent, indicating rising concern about the size of inventory stocks on hand. The sharp decline in expected real sales gains changed “satisfactory” stock levels into “excessive” for many firms.
INFLATION
The net percent of owners raising average selling prices fell 5 points to a net 11 percent, seasonally adjusted, reversing most of the 7 point surge in June. Seasonally adjusted, a net 17 percent plan price hikes (down 5 points). While 11 percent reported cutting selling prices in recent months, only 2 percent plan to do so, suggesting that most price cutting is an unanticipated, unplanned response to market conditions–a healthy process. This does not reflect higher inflation.
COMPENSATION AND EARNINGS
Reports of higher worker compensation fell 3 points to a net 29 percent of all firms–a relatively high reading. Plans to raise compensation rose 2 points to a net 19 percent. Overall, the gap between the percent raising prices and the percent raising compensation gradually closed last year, but then surged to over 20 points in the first half of 2019. In August, the gap was still 18 percentage points, indicating that owners are still not passing on higher compensation costs. Firms are likely to continue to offer improved compensation to attract and retain qualified workers because the only solution in the short term to an employee shortage is to raise compensation to attract new workers and train less qualified employees.
CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied, up 1 point but historically near a record low. Thirty-one percent reported all credit needs met (up 3 points) and 52 percent said they were not interested in a loan, down 4 points. One percent reported their last loan was harder to get than the previous one, the record low. Credit conditions are about as supportive as they have ever been in the 46-year survey history. Thirty-three percent of all owners reported borrowing on a regular basis (up 4 point). The average rate paid on short maturity loans fell 30 basis points to 6.1 percent. Overall, credit markets have been very supportive of growth and will not likely become an impediment this year with the Fed cutting rates. However, a more dismal outlook for the economy will reduce capital spending and the associated borrowing to finance it.
COMMENTARY
Wall Street commentators joined by some economists have produced a cacophony of warnings about a coming recession. Not joining the noise is half the U.S. economy: small businesses. They do not agree and don’t see a disaster in the near future. They are also quite unsure that cutting interest rates now will help the Federal Reserve to get more inflation or spur spending. On Main Street, inflation pressures are very low. Spending and hiring are strong, but a quarter point reduction will not spur more borrowing and spending, especially when expectations for business conditions and sales are falling because of all the news about the coming recession. Cheap money is nice but not if there are fewer opportunities to invest it profitably. There is a recession coming, there always is, even from the day an expansion begins. Proponents of the “inverted yield curve” (pick the rates to support your position) say a recession follows in 18-24 months, so enjoy the good times till then!
The economy is now entering the pre-election fog that will produce many unrealistic but attractive promises, more government spending, and likely continued reductions in interest rates. The Federal Reserve will continue to respond to Wall Street wishes and money will continue to flood our bond markets from an underperforming “rest of the world.” Virtually all except the Fed will be happy with low inflation. A rule of thumb definition of a recession is back-to-back quarters with negative GDP growth. The third quarter will definitely be positive, leaving only Q4 and the first three quarters of 2020 to experience a recession. Consumer spending has been strong and will likely carry though into 2020. Main Street is doing well. So the odds of a recession before the election are slim. Time is running out for those rooting for a recession. But they should be reminded that recessions hurt lots of people, not just decide election outcomes.
