NFIB SMALL BUSINESS. William C. Dunkelberg Holly Wade SMALL BUSINESS OPTIMISM INDEX COMPONENTS. Seasonally Adjusted Level

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1 NFIB SMALL BUSINESS ECONOMIC TRENDS William C. Dunkelberg Holly Wade 21 Based on a Survey of Small and Independent Business Owners SMALL BUSINESS OPTIMISM INDEX COMPONENTS Index Component Seasonally Adjusted Level Change from Last Month Contribution to Index Change Plans to Increase Employment 18% -1 *% Plans to Make Capital Outlays 27% *% Plans to Increase Inventories 4% -3 *% Expect Economy to Improve 32% 1 *% Expect Real Sales Higher 21% 6 *% Current Inventory -5% -2 *% Current Job Openings 35% 5 *% Expected Credit Conditions -5% -1 *% Now a Good Time to Expand 23% 6 *% Earnings Trends -14% -3 *% Total Change 8 *% (Column 1 is the current reading; column 2 is the change from the prior month; column 3 the percent of the total change accounted for by each component; * is under 1 percent and not a meaningful calculation)

2 NFIB SMALL BUSINESS ECONOMIC TRENDS NFIB Research Center has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since The sample is drawn from the membership files of the National Federation of Independent Business (NFIB). Each was mailed a questionnaire and one reminder. Subscriptions for twelve monthly SBET issues are $25. Historical and unadjusted data are available, along with a copy of the questionnaire, from the NFIB Research Center. You may reproduce Small Business Economic Trends items if you cite the publication name and date and note it is a copyright of the NFIB Research Center. NFIB Research Center. ISBS # Chief Economist William C. Dunkelberg and Director, Research and Policy Analysis Holly Wade are responsible for the report. IN THIS ISSUE Summary Commentary Optimism Outlook Earnings Sales Prices Employment Compensation Credit Conditions Inventories Capital Outlays Most Important Problem Survey Profile Economic Survey

3 1 NFIB Small Business Economic Trends Quarterly Report SUMMARY OPTIMISM INDEX The Index of Small Business Optimism gained.8 points to 13.8 in October, maintaining a streak of robust readings. Four of the 1 Index components posted a gain, 5 declined and one was unchanged. Labor market indicators point to continued good jobs reports, as reports of actual employment gains for October posted solid numbers and reports of job openings surged to record territory. Reports of increased compensation remained strong, and the incidence of reported price increases rose a bit, good news for the Federal Reserve, which wants more inflation. Plans to spend on inventory and capital projects didn t advance but held at solid levels. Owners became much more optimistic about the environment for expansion, which implies a more positive longer-run view. In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year. The net percent of owners reporting positive sales trends did not improve but did remain positive. LABOR MARKETS Job creation strengthened in the small-business sector as business owners reported a seasonally adjusted average employment change per firm of.17 workers. Fourteen percent (up 2 points) reported increasing employment an average of 3.5 workers per firm and 11 percent (down 2 points) reported reducing employment an average of 2.2 workers per firm (seasonally adjusted). Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points, the highest reading since November 21. Fifty-nine percent reported hiring or trying to hire (up 2 points), but 52 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 1 point), second only to taxes and the highest reading since 2. This is the top ranked problem for those in construction (31 percent) and manufacturing (27 percent). A seasonally adjusted net 18 percent plan to create new jobs, down 1 point from September s strong reading. CREDIT MARKETS Four percent of owners reported that all their borrowing needs were not satisfied, up 2 points and historically low. Twenty-nine percent reported all credit needs met (down 4 points) and 53 percent said they were not interested in a loan, up 2 points. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 14 percent citing regulations and red tape, and 2 percent the availability of qualified labor. Thirty percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans was up 4 basis points at 6. percent, little changed even as the Federal Reserve has been raising rates. This survey was conducted in October 217. A sample of 1, small-business owners/members was drawn. One thousand five hundred and thirty-three (1,513) usable responses were received a response rate of 15 percent.

4 2 NFIB Small Business Economic Trends Quarterly Report SUMMARY SALES AND INVENTORIES The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a net 1 percent, unchanged from September. Consumer spending slowed at the end of the third quarter and hurricanes definitely depressed shopping in large parts of the country. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 6 points, rising to a net 21 percent of owners, after a 12-point drop in September. What triggered September s large decline in expectations is less clear, as reports on the economy were fairly good. The net percent of owners reporting inventory increases rose 2 points to a net percent (seasonally adjusted). Inventory building did occur for the economy as a whole, but in the form of reduced rates of depletion in the small business sector. The net percent of owners viewing current inventory stocks as too low lost 2 points to a net negative 5 percent, a less positive view of the need for current stocks. This is a bit surprising in light of the rather positive view of real sales trends in the next 3 months. The net percent of owners planning to add to inventory fell 3 points to a net 4 percent, a solid figure that is supportive of fourth quarter growth. INFLATION The net percent of owners raising average selling prices rose 2 points to a net 8 percent. Clearly, inflation is not breaking out across the country as the Federal Reserve hoped. Ten percent of owners reported reducing their average selling prices in the past three months (unchanged), and 16 percent reported price increases (up 1 point), illustrative of the dynamics of price adjustments in the private sector to changes in economic conditions and demand. Seasonally adjusted, a net 22 percent plan price hikes, although far fewer will report actually doing so in the following months. COMPENSATION AND EARNINGS Reports of higher worker compensation rose 2 points to a net 27 percent, historically strong. 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. A near-record 2 percent selected finding qualified labor as their top business problem. Plans to raise compensation rose 3 points in frequency to a net 21 percent, following a 3 point rise in September. Gains in compensation are to be expected when labor markets are very tight as they appear to be. CAPITAL SPENDING Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 3 points). Seven percent acquired new buildings or land for expansion (up 1 point) and 12 percent spent money for new fixtures and furniture (unchanged). The percent of owners planning capital outlays was unchanged at 27 percent. The recovery from the hurricanes will undoubtedly raise these numbers.

5 3 NFIB Small Business Economic Trends Quarterly Report COMMENTARY The preliminary estimate of third quarter growth came in at 3 percent, but this figure will be revised several times before the official figure is reported. It was virtually unchanged from the 3.1 percent growth for the second quarter. Domestic spending was weaker, closer to a 2 percent rate of growth. Residential investment spending faltered a bit, perhaps due to supply constraints, such as shortage of labor, not weaker demand. Consumer sentiment surged based on optimism about jobs and incomes, an encouraging development as consumers account for 7 percent of GDP. There will be a pickup in auto spending (replacing hurricane-damaged cars) and home improvement spending, due to hurricane damage, and the rising prices of houses due to a shortage of new supply. The Federal Reserve will boost rates again in December, by 25 basis points, putting the policy range at % for Federal Funds. But that will leave the rate at about half of the level that history would suggest. It will also stop reinvesting $1 billion of maturity proceeds each month, gradually increasing this to $5 billion per month. The Federal Reserve has not signaled how much lower it will take its $4.5 trillion portfolio, but the reduction will be slow. Less Federal Reserve buying, however, will put some upward pressure on interest rates. The Federal Reserve is still in control of rates and bond investors will bet on the Federal Reserve, not markets. New Federal Reserve management will soon be in place and it will like set a less cautious path for normalization. Congress has taken its first cut at tax reform and small business owners are eagerly waiting to see how the developing legislation will benefit them. Historically, Congress has given inadequate consideration of the impact of their laws on small firms, paying more attention to lobbies from the largest firms and unwittingly saddling small firms with costly and inappropriate (of little or no value to society) regulations promulgated for large firms. Owners remain hopeful that whatever the final tax legislation looks like, it will be a positive change from current law.

6 4 NFIB Small Business Economic Trends Quarterly Report Percent "Good Time to Expand" (thick line) Percent "Better" Minus "Worse" Expected General Business Conditions (thin line) Index Value (1986=1) OVERVIEW - SMALL BUSINESS OPTIMISM OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=1) OPTIMISM INDEX Based on Ten Survey Indicators (Seasonally Adjusted 1986=1) SMALL BUSINESS OUTLOOK OUTLOOK Good Time to Expand and Expected General Business Conditions January Quarter 1974 to October Quarter

7 5 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS OUTLOOK (CONTINUED) OUTLOOK FOR EXPANSION Percent Next Three Months Good Time to Expand MOST IMPORTANT REASON FOR EXPANSION OUTLOOK Reason Percent by Expansion Outlook October 217 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates Cost of Expansion 6 7 Political Climate Other/Not Avai l abl e OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now

8 6 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January Quarter 1974 to October Quarter ACTUAL EARNINGS CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months MOST IMPORTANT REASON FOR LOWER EARNINGS Percent Reason October 217 Reas on Current Month One Year Ago Two Years Ago Sales Volume Increased Costs* Cut Selling Prices Us ual Seas onal Chang Other * Increased costs include labor, materials, finance, taxes, and regulatory costs.

9 7 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS SALES SALES Actual (Prior Three Months) and Expected (Subsequent Three Months) January 1974 to October Expected Actual ACTUAL SALES CHANGES Net Percent ( Higher Minus Lower ) Last Three Months Compared to Prior Three Months SALES EXPECTATIONS Net Percent ( Higher Minus Lower ) During Next Three Months

10 8 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS PRICES PRICES Actual Last Three Months and Planned Next Three Months January Quarter 1974 to October Quarter Actual Planned ACTUAL PRICE CHANGES Net Percent ( Higher Minus Lower ) Compared to Three Months Ago PRICE PLANS Net Percent ( Higher Minus Lower ) in the Next Three Months

11 Percent 9 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS EMPLOYMENT ACTUAL EMPLOYMENT CHANGES Net Percent ( Increase Minus Decrease ) in the Last Three Months QUALIFIED APPLICANTS FOR JOB OPENINGS Percent Few or No Qualified Applicants EMPLOYMENT Planned Next Three Months and Current Job Openings January Quarter 1974 to October Quarter Planned Job Openings

12 1 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS EMPLOYMENT (CONTINUED) JOB OPENINGS Percent With Positions Not Able to Fill Right Now HIRING PLANS Net Percent ( Increase Minus Decrease ) in the Next Three Months SMALL BUSINESS COMPENSATION COMPENSATION Actual Last Three Months and Planned Next Three Months January 1986 to October Planned Higher 5 Actual Higher

13 Prices (Thick Line) Labor Compensation (Thin Line) 11 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS COMPENSATION (CONTINUED) ACTUAL COMPENSATION CHANGES Net Percent ( Increase Minus Decrease ) During Last Three Months COMPENSATION PLANS Net Percent ( Increase Minus Decrease ) in the Next Three Months PRICES AND LABOR COMPENSATION Net Percent Price Increase and Net Percent Compensation Increase

14 12 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS CREDIT CONDITIONS CREDIT CONDITIONS Loan Availability Compared to Three Months Ago* January Quarter 1974 to October Quarter * For the population borrowing at least once every three months. REGULAR BORROWERS Percent Borrowing at Least Once Every Three Months AVAILABILITY OF LOANS Net Percent ( Easier Minus Harder ) Compared to Three Months Ago (Regular Borrowers)

15 Relative (thick line) Actual (thin line) 13 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS CREDIT CONDITIONS (CONTINUED) BORROWING NEEDS SATISFIED Percent of All Businesses Last Three Months Satisfied/ Percent of All Businesses Last Three Months Not Satisfied (All Borrowers) 212 3/7 31/7 27/8 31/8 29/9 29/7 3/7 31/7 32/8 28/8 28/6 29/ /6 29/7 29/7 31/6 28/5 29/5 3/5 31/5 28/6 28/6 32/4 32/ /5 29/5 3/5 3/5 3/5 27/6 3/6 28/4 28/6 29/4 29/4 32/ /4 33/3 35/5 31/4 3/4 32/5 32/4 33/3 3/2 3/3 32/3 32/ /3 31/4 31/5 31/4 31/4 32/5 3/3 29/4 32/6 29/4 3/4 29/ /4 3/3 32/4 32/3 31/3 27/4 31/3 34/3 33/2 29/4 EXPECTED CREDIT CONDITIONS Net Percent ( Easier Minus Harder ) During Next Three Months (Regular Borrowers) INTEREST RATES Relative Rates and Actual Rates Last Three Months January Quarter 1974 to October Quarter

16 14 NFIB Small Business Economic Trends Quarterly Report Net Percent SMALL BUSINESS CREDIT CONDITIONS (CONTINUED) RELATIVE INTEREST RATE PAID BY REGULAR BORROWERS* Net Percent ( Higher Minus Lower ) Compared to Three Months Ago *Borrowing at Least Once Every Three Months. ACTUAL INTEREST RATE PAID ON SHORT-TERM LOANS BY BORROWERS Average Interest Rate Paid SMALL BUSINESS INVENTORIES INVENTORIES Actual (Last Three Months) and Planned (Next Three Months) January Quarter 1974 to October Quarter 217 Actual Planned

17 15 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS INVENTORIES (CONTINUED) ACTUAL INVENTORY CHANGES Net Percent ( Increase Minus Decrease ) During Last Three Months INVENTORY SATISFACTION Net Percent ( Too Low Minus Too Large ) at Present Time Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec INVENTORY PLANS Net Percent ( Increase Minus Decrease ) in the Next Three to Six Months Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

18 16 NFIB Small Business Economic Trends Quarterly Report Percent Percent SMALL BUSINESS CAPITAL OUTLAYS INVENTORY SATISFACTION AND INVENTORY PLANS Net Percent ( Too Low Minus Too Large ) at Present Time Net Percent Planning to Add Inventories in the Next Three to Six Months Satisfaction Inventory Plans CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January Quarter 1974 to October Quarter Actual Expected ACTUAL CAPITAL EXPENDITURES Percent Making a Capital Expenditure During the Last Six Months Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

19 17 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS CAPITAL OUTLAYS (CONTINUED) TYPE OF CAPITAL EXPENDITURES MADE Percent Purchasing or Leasing During Last Six Months Type Current One Year Ago Two Years Ago Vehicles Equipment Furniture or Fixtures Add. Bldgs. or Land Improved Bldgs. or Land AMOUNT OF CAPITAL EXPENDITURES MADE Percent Distribution of Per Firm Expenditures During the Last Six Months Amount Current One Year Ago Two Years Ago $1 to $ $1, to $4, $5, to $9, $1, to $49, $5, to $99, $1, No Answer 1 2 CAPITAL EXPENDITURE PLANS Percent Planning a Capital Expenditure During Next Three to Six Months Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

20 18 NFIB Small Business Economic Trends Quarterly Report Percent of Firms Percent of Firms SINGLE MOST IMPORTANT PROBLEM Problem SINGLE MOST IMPORTANT PROBLEM October 217 Current One Year Ago Survey High Survey Low Taxes Inflation Poor Sales Fin. & Interest Rates Cost of Labor Govt. Reqs. & Red Tape Comp. From Large Bus Quality of Labor Cost/Avail. of Insurance Other SELECTED SINGLE MOST IMPORTANT PROBLEM Insurance, Big Business Competition, Inflation, and Regulation January Quarter 1974 to October Quarter 217 Big Business Insurance 3 Inflation Regulation SELECTED SINGLE MOST IMPORTANT PROBLEM Sales, Fin. & Interest Rates, Labor Cost, Labor Quality, and Taxes January Quarter 1974 to October Quarter Taxes Interest Rates Sales Labor Quality

21 Percent 19 NFIB Small Business Economic Trends Quarterly Report Percent SURVEY PROFILE OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY NFIB Actual Number of Firms Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec NFIB OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY Industry of Small Business NFIB OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY Number of Full and Part-Time Employees

22 2 NFIB Small Business Economic Trends Quarterly Report NFIB RESEARCH CENTER SMALL BUSINESS ECONOMIC SURVEY SMALL BUSINESS SURVEY QUESTIONS PAGE IN REPORT Do you think the next three months will be a good time for small business to expand substantially? Why? About the economy in general, do you think that six months from now general business conditions will be better than they are now, about the same, or worse? Were your net earnings or income (after taxes) from your business during the last calendar quarter higher, lower, or about the same as they were for the quarter before? If higher or lower, what is the most important reason? During the last calendar quarter, was your dollar sales volume higher, lower, or about the same as it was for the quarter before? Overall, what do you expect to happen to real volume (number of units) of goods and/or services that you will sell during the next three months? How are your average selling prices compared to three months ago? In the next three months, do you plan to change the average selling prices of your goods and/or services? During the last three months, did the total number of employees in your firm increase, decrease, or stay about the same? If you have filled or attempted to fill any job openings in the past three months, how many qualified applicants were there for the position(s)? Do you have any job openings that you are not able to fill right now? In the next three months, do you expect to increase or decrease the total number of people working for you? Over the past three months, did you change the average employee compensation? Do you plan to change average employee compensation during the next three months?

23 21 NFIB Small Business Economic Trends Monthly Report SMALL BUSINESS SURVEY QUESTIONS PAGE IN REPORT Are loans easier or harder to get than they were three months ago? During the last three months, was your firm able to satisfy its borrowing needs? Do you expect to find it easier or harder to obtain your required financing during the next three months? If you borrow money regularly (at least once every three months) as part of your business activity, how does the rate of interest payable on your most recent loan compare with that paid three months ago? If you borrowed within the last three months for business purposes, and the loan maturity (pay back period) was 1 year or less, what interest rate did you pay? During the last three months, did you increase or decrease your inventories? At the present time, do you feel your inventories are too large, about right, or inadequate? Looking ahead to the next three months to six months, do you expect, on balance, to add to your inventories, keep them about the same, or decrease them? During the last six months, has your firm made any capital expenditures to improve or purchase equipment, buildings, or land? If [your firm made any capital expenditures], what was the total cost of all these projects? Looking ahead to the next three to six months, do you expect to make any capital expenditures for plant and/or physical equipment? What is the single most important problem facing your business today? Please classify your major business activity, using one of the categories of example below How many employees do you have full and part-time, including yourself?