June 2019 Report: Small Business Optimism Index Small Business Optimism Reverses Last Month’s Gain as Uncertainty Rises
Though uncertainty levels increased, job openings and plans to create jobs remain historically strong.
America’s small business owners’ optimism took a modest downturn in June, according to the NFIB Small Business Optimism Index, slipping 1.7 points to 103.3. While optimism remains at historically high levels, the June figure reverses the gain posted in May, with six components falling, three improving, and one unchanged. The Uncertainty Index rose substantially, increasing seven points to the highest level since March 2017.
“Last month, small business owners curbed spending, sales expectations and profits both fell, and the outlook for expansion dampened. When you add difficulty finding qualified workers and harmful state level laws and regulations, you’re left with a volatile mix where uncertainty has increased to levels not seen in more than two years,” said NFIB President and CEO Juanita D. Duggan.
Both capital spending plans and reports of actual spending fell in June, reversing last month’s gains. The inventory component strengthened in June with owners saying existing inventory stocks were lean and planning to add to them. Sales and earnings trends softened, while expected credit conditions remained favorable. More owners expect credit conditions to tighten rather than ease by a two-to-one margin, with most expecting no change.
“As expectations for sales gains and the general business environment faded, uncertainty levels increased,” said NFIB Chief Economist William Dunkelberg. “Still, job openings and plans to create jobs remain historically very strong, and while it’s not as ‘hot’ as May, Main Street is still running strong.”
Twenty-six percent of owners plan capital outlays in the next few months, down four points, and an indication there is more reluctance to make major spending commitments when the future becomes less certain. Fifty-four percent reported capital outlays, down 10 points. Of those making expenditures, 40 percent reported spending on new equipment (down four points), 22 percent acquired vehicles (down seven points), and 12 percent improved or expanded facilities (down seven points).
The net percent of owners reporting inventory increases fell two points to a net zero percent, indicating no further building in inventory stocks in June. The net percent of owners viewing current inventory stocks as “too low” rose four points to a net zero percent, overall balance. Major imbalances reported in May have been resolved in most industries with the exception of manufacturing (18 percent too large, five percent too low) and agriculture (eight percent too large, 14 percent too low). The net percent of owners planning to expand inventory holdings did increase one point to a net three percent, a solid number.
A net seven percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down two percentage points but a very solid reading. The net percent of owners expecting higher real sales volumes fell six points to a net 17 percent of owners. Excluding the government shutdown earlier this year, this is the weakest reading since September 2017.
“Contextually, owners expecting higher real sales volumes averaged a net negative three percent in the 12 months leading up to November 2016, making the current reading look relatively good, but not as good as the 31 percent reading in May of last year,” said Dunkelberg. “The economy is still advancing at a solid pace, but it is expected to be a slower pace than the first quarter.”
The frequency of reports of positive profit trends slipped six points to a net negative seven percent reporting quarter on quarter profit improvements. Twenty-seven percent of those reporting weaker profits blamed sales (down three points), 12 percent blamed labor costs (up five points), 11 percent cited materials costs, and nine percent cited lower selling prices (down two points).
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically very low. Twenty-nine percent reported all credit needs met (down five points) and 55 percent said they were not interested in a loan, up one point. A record low two percent reported their last loan was harder to get than the previous one. Two percent reported that financing was their top business problem (unchanged) compared to 21 percent citing the availability of qualified labor, 18 percent citing taxes, 13 percent regulations and red tape.
As reported in the June NFIB Jobs Report, small business owners added a net addition of 0.21 workers per firm, with 21 percent citing the difficulty of finding qualified workers as their Single Most Important Business Problem. Fifty-eight percent of owners reported hiring or trying to hire employees, down four points from last month, but 50 percent reported few or no qualified applicants for the positions they were trying to fill.
LABOR MARKETS
Thirty-six percent of all owners reported job openings they could not fill in the current period, down 2 points from May but still high. A seasonally-adjusted net 19 percent plan to create new jobs, down 2 points. Fifty-eight percent reported hiring or trying to hire (down 4 points), but 50 percent reported few or no qualified applicants for the positions they were trying to fill. The demand for workers has not faded and remains at record levels.
Thirty-one percent have openings for skilled workers (down 1 point) and 14 percent have openings for unskilled labor (down 2 points). Thirty-one percent of owners reported few qualified applicants for their open positions (down 2 points) and 19 percent reported none (down 2 points).
SALES AND INVENTORIES
A net 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 percentage points but a very solid reading. The net percent of owners expecting higher real sales volumes fell 6 points to a net 17 percent of owners, the weakest reading since September 2017 (excluding the government shutdown months earlier this year).
The net percent of owners reporting inventory increases fell 2 points to a net 0 percent, indicating no further building in inventory stocks in June. The net percent of owners viewing current inventory stocks as “too low” rose 4 points to a net 0 percent, overall balance. The net percent of owners planning to expand inventory holdings did increase 1 point to a net 3 percent, a solid number. It appears that the excessive inventory build in the first quarter was substantially resolved in the second quarter.
CAPITAL SPENDING
Fifty-four percent reported capital outlays, down 10 points, reversing May’s strong investment performance. This is the lowest level since at May 2015. Overall, there was a substantial reduction in investment spending in June that offset May’s surge, and that was consistent with the sharp drop in expected sales, a reversal in profit trends and a deterioration in views about the current period as a good time to expand.
Twenty-six percent plan capital outlays in the next few months, down 4 points. However, plans to invest did increase in construction (38 percent, up 7 points). Investment spending has been solid for the past two years, but the reversal in June in not good news. The Uncertainty Index rose substantially, rising 7 points to the highest level since March 2017. Owners are more reluctant to make major spending commitments when the future becomes less certain.
INFLATION
The net percent of owners raising average selling prices rose 7 points to a net 17 percent, seasonally adjusted. Seasonally adjusted, a net 23 percent plan price hikes (up 3 points). While 8 percent reported cutting selling prices, only 1 percent plan to do so, suggesting that most price cutting is an unanticipated, unplanned response to market conditions, a healthy process. The Federal Reserve will like the June actual and planned price changes, indicating a pick-up in inflation. The rest of us, not so much.
COMPENSATION AND EARNINGS
Reports of higher worker compensation fell 6 points to a net 28 percent of all firms. Plans to raise compensation fell 3 points to a net 21 percent. Owners are passing on higher compensation costs in higher prices, along with tariff associated costs, while planning to back off on increases in labor costs. Twenty-one percent (down 4 points) selected “finding qualified labor” as their top business problem, more than cited taxes or regulations. 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. The frequency of reports of positive profit trends slipped 6 points to a net negative 7 percent reporting quarter on quarter profit improvements, a much steeper decline than reported for sales.
CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically very low. Twenty-nine percent reported all credit needs met (down 5 points) and 55 percent said they were not interested in a loan, up 1 point. Credit conditions are about as favorable as they have ever been in the 46-year survey history. The percent of owners reporting paying a higher rate on their most recent loan was 10 percent, down 2 points. Twenty-eight percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans fell 100 basis points to 6.8 percent. Overall, credit markets have been very supportive of growth and will not likely become an impediment this year, even if lending rates do rise.
COMMENTARY
The Federal Reserve Bank of the United States has now taken center stage in the financial news. We are told that the market wants an interest rate cut and that we need one to inoculate the economy against a recession. We “know” this because the market has now bet zillions of dollars on lower rates which puts downward pressure on actual rates. Confirming the “who” that wants lower rates, when Fed Chairman Powell hinted at entertaining lower rates at his Chicago Listening Tour event, the S&P500 rose 500 points. Wall Street investors cheered!
But the stock market is not Main Street where roughly 30 million firms of various sizes drive the real economy. About six million of those firms are employer firms, and all but about 20,000 of them have fewer than 500 employees and most are not publicly traded business entities. Main Street is strong. While the Index faded a bit in June, it is still one of the strongest readings in the survey’s history. There was some deterioration in areas, but not with interest rates or credit conditions. June brought back a high level of uncertainty, a decline in capital spending, higher prices due to compensation pressures and tariffs, and softening of sales expectations.
Interest rates paid by Main Street firms for loans remain historically low, a record low percent of owners report that their credit needs weren’t met (3 percent, see preceding section) and just as few (4 percent) reported that the loans were harder to get. This is not a credit environment that needs a rate cut.
An additional concern is that many supporters of a rate cut (including at the Fed) argue that the cut is needed in order to create more inflation to meet the Fed’s arbitrary 2 percent target. Their argument is that lower rates will stimulate more spending and create the inflation they need to meet their target. This is a disconcerting argument because low rates did not stimulate significant spending up through 2016, but they did deprive savers of trillions of dollars in interest income. Meantime, firms of all sizes report that they cannot find employees needed to produce more stuff and the unemployment rates is near record low levels, a condition of “full employment.” It is strange to see the central bank that is committed to “stable prices” in its charter working so hard to create inflation.
If growth slows, that is not bad in a fully employed economy that can’t find enough workers to fill open job positions. The labor supply has become a constraint on growth, especially in industries like construction and transportation. The economy is at “full employment” and that can be sustained with growth rates under 3 percent.
