NFIB Survey Shows Record Number of Small Businesses Seeing Profit Growth
Small Business Optimism Continues to Climb
The National Federation of Independent Business (NFIB) has been gathering data on small businesses in the United States since 1973. The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership (presently 325,000). The report is released on the second Tuesday of each month. This survey was conducted in April 2018.
The NFIB Small Business Optimism Index surged to record levels in April bolstered by strong profit growth among America’s small businesses according to the report, recording an all-time index reading high of 104.8.
“Never in the history of this survey have we seen profit trends so high”, said NFIB President and CEO Juanita Duggan. “The optimism small businesses owners have about the economy is turning into new job creation, increased wages and benefits, and investment.”
Reflecting the trends in the larger economy the NFIB report cites that
the share of small business owners who are hiring or trying to hire rose four points to 57 percent, and new job creation remains at historically strong levels, with a net 16 percent of owners planning to create new jobs. Significantly more new businesses are opening than closing, providing a major boost to new employment
“There is no question that small business is booming,” said NFIB Chief Economist Bill Dunkelberg. “Consumer spending, the new tax law, and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.”
Labor Markets Red Hot
Departing somewhat from the subdued BLS Report for March, small business owners reported adding a net 0.28 workers per firm on average, the third highest reading since 2006 (down from 0.36 workers reported last month, the highest since 2006). Sixteen percent (up 2 points) reported increasing employment an average of 2.7 workers per firm and 9 percent (unchanged) reported reducing employment an average of 2.5 workers per firm (seasonally adjusted).
The NFIB report cites approximately one-third of business owners reporting that they cannot fill open positions due to a shortage of qualified labor.
Thirty-five percent of all owners reported job openings they could not fill in the current period, unchanged and tied with March 2018, July and October 2017 for the highest reading since November 2000. Twelve percent reported using temporary workers, up 2 points. Reports of job openings were most frequent in construction (48 percent) and manufacturing (48 percent). The inability of construction firms to organize teams is slowing the construction of new homes at all levels.
SALES AND INVENTORIES
The report shows strong consumer demand despite a slight drop-off in the first quarter of 2018
The net percent of owners expecting higher real sales volumes rose 1 point to a net 21 percent of owners. Fifty-nine percent of construction firms and 56 percent of manufacturing firms expect higher real sales volumes in the coming months. The average family saw wages and salaries grow last year. Gains are likely to increase for many families this year due to tax cuts. Consumer sentiment has remained solid, anticipating continued good spending in the coming months.
Concerning inventories, recent wholesale inventories slipped in April and across the board there appears to be a draw-down in retail and wholesale stocks.
The net percent of owners viewing current inventory stocks as “too low” (a positive number means more think stocks are too low than too high, a positive for inventory building) improved 2 points to a negative 4 percent. The build in inventory is clearly not excessive in the minds of owners expecting continued strong sales.
The net percent of owners planning to build inventories was unchanged at 1 percent, the eighteenth positive reading in the past 19 months. This has been very supportive of GDP growth over that period.
Capital spending continued the upward overall trend. Sixty-one percent reported capital outlays, up 3 points. Of those making expenditures, 43 percent reported spending on new equipment (up 4 points), 27 percent acquired vehicles (up 3 points), and 16 percent improved or expanded facilities (unchanged). Five percent acquired new buildings or land for expansion (down 3 points) and 15 percent spent money for new fixtures and furniture (up 3 points). Non-residential fixed investment has grown at a better than 6 percent rate for the past 5 quarters (compared to under 1 percent in 2015 and 2016) and small business has made a major contribution.
Twenty-nine percent plan capital outlays in the next few months, up 3 points. Plans were most frequent in manufacturing (38 percent) where additional capacity and productivity-enhancing investments are needed and construction (32 percent) where labor-saving investments are needed to increase the number of housing starts and completions. Hiring difficulties will lead firms to engage in more training and adopt more labor-saving technology to support growth and serve growing numbers of customers.
COMPENSATION AND EARNINGS
Worker compensation remains low but shows a steady-to-increasing trend into 2018.
Reports of higher worker compensation were unchanged at a net 33 percent, the highest reading since 2000. Although government reports of wage and salary gains remain historically low, they are the best in a long time and don’t include benefits. Historically wage gains were larger, but that was in environments with much higher inflation. Plans to raise compensation rose 2 points to a net 21 percent, historically high, but below its recent peak of 24 percent in January.
Owners complain at record rates of labor quality issues, with 88 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Twenty-two percent (up 1 point) selected “finding qualified labor” as their top business problem, more than cited taxes, weak sales, or the cost of regulations as their top challenge.
The frequency of reports of positive profit trends improved 3 percentage points to a net negative 1 percent reporting quarter on quarter profit improvements, the best reading in the survey’s 45 year history. Although the new tax law will impact profits this year, much of the current improvement is due to gains in operating profits and stronger sales. Sales gains from stronger growth fall to the bottom line before costs such as rising labor costs catch up. Overall, the new tax law and the strong economy are very supportive of profit improvements.
Price pressures appear to be subdued and leveling.
The net percent of owners raising average selling prices fell 2 points to a net 14 percent seasonally adjusted, breaking a steady march to higher levels that started in November of 2016. The Federal Reserve’s target of 2 percent inflation (based on the headline Personal Consumption Deflator) has not been reached, but it is close. But, if Main Street slows the frequency of its price hikes, reaching the goal will become more difficult. Unadjusted, 9 percent of owners reported reducing their average selling prices in the past three months (up 1 point), and 26 percent reported price increases (unchanged).
Seasonally adjusted, a net 22 percent plan price hikes (down 3 points). With reports of increased compensation running high, there is more pressure to pass these costs on in higher selling prices, although tax cuts and growing operating profits alleviate some of this pressure. Still, as the gap between the percent raising compensation and raising prices closes, more of these costs will be passed on to customers. The NFIB data predict a PCE inflation rate of 2.1 percent in the months ahead.
CREDIT MARKETS and SMALL BUSINESS LOANS
Small business loans remain a foundation of growth and stability.
Thirty-one percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was up 30 basis points at 6.4 percent, rates are rising gradually with Fed policy moves. In anticipation of the Federal Reserve rate hikes, borrowers have increased their demand for fixed rate loans with longer maturities.