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 October 215 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 11% -1 * Plans to Make Capital Outlays 26% 1 * Plans to Increase Inventories % -3 * Expect Economy to Improve -4% * Expect Real Sales Higher 4% 3 * Current Inventory -4% 1 * Current Job Openings 27% * Expected Credit Conditions -5% 1 * Now a Good Time to Expand 13% 1 * Earnings Trends -16% -3 * Total Change * (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 Foundation 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 Foundation. 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 Foundation. NFIB Research Foundation. 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 was unchanged in October, posting no change after a rise of only.2 points in September and a gain of only.5 points in August. So the Index remains stuck at a below average reading of Although the labor market components posted minor declines, they held at historically strong levels but this time owners reported no net growth in employment, a significant decline from reports in the previous four months. LABOR MARKETS Reported job creation came to a halt in October, with owners adding a net. workers per firm in recent months. Fifty-five percent reported hiring or trying to hire (up 2 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, unchanged from September. Twentyseven percent of all owners reported job openings they could not fill in the current period, unchanged from September. A seasonally adjusted net 11 percent plan to create new jobs, down 1 point. A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 2 points from the past few months. The percent of owners citing the difficulty of finding qualifed workers as their Most Important Business Problem fell 3 points to 13 percent, but still third on the list of problems behind taxes and regulations and red tape. CAPITAL SPENDING Fifty-eight percent reported capital outlays, unchanged from August and September. The percent of owners planning capital outlays in the next 3 to 6 months gained 1 point to 26 percent, not a strong reading historically but among the best in this expansion. Owner expectations for the economy overall appear to anticipate a continuation of under-performance. Investment plans remain historically sub-par, and owners have little interest in borrowing to support investment spending that promises little return. The small business sector remains in maintenance mode. PROFITS AND WAGES Earnings trends deteriorated 3 points, falling to a negative 16 percent. Far more owners are reporting profits lower quarter to quarter than higher. A seasonally adjusted net 21 percent of owners reported raising worker compensation, down 2 points from September and 4 points below the expansion high reading reached in January and May. The net percent planning to increase compensation rose 1 point to 17 percent, still strong for this recovery. This survey was conducted in October 215. A sample of 1,799 small-business owners/members was drawn. One thousand four hundred and eleven (1,411) usable responses were received a response rate of 14 percent.

4 2 NFIB Small Business Economic Trends Quarterly Report SUMMARY INVENTORIES AND SALES The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months deteriorated 7 percentage points to a net negative 8 percent. Twelve percent cited weak sales as their top business problem, up 1 point. Expected real sales volumes posted a 3 point improvement, rising to a seasonally adjusted net 4 percent of owners expecting gains, a long way down from the 2 percent reading in December 214. Overall, not a very positive outlook, but at least positive. The net percent of owners reporting inventory increases was a net negative 2 percent (seasonally adjusted), down 2 points. The net percent of owners viewing current inventory stocks as too low was unchanged a net negative 4 percent, as weak sales made current stocks look excessive and future sales are not expect to grow much. The net percent of owners planning to add to inventory fell 3 points to a net percent, not much help for Q4 GDP growth. INFLATION Seasonally adjusted, the net percent of owners raising selling prices was 2 percent, up 1 point from September. This is bad news for the Federal Reserve which is trying to stoke the flames of inflation in order to prevent deflation from setting in. For the rest of us, low inflation is good news. Seasonally adjusted, a net 14 percent plan price hikes (up 1 point). If history repeats, this will be offset by unplanned reductions in selling prices. CREDIT MARKETS Three percent of owners reported that all their borrowing needs were not satisfied, up 1 point from the record low reached in September. Thirty percent reported all credit needs met (unchanged), and 53 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the credit sidelines, seeing no good reason to borrow. Only 2 percent reported that financing was their top business problem. In the Great Recession, no more than 5 percent cited credit availability and interest rates as their top problem compared to as high as 37 percent in the Volcker era. Twenty-eight percent of all owners reported borrowing on a regular basis, down 1 point. The average rate paid on short maturity loans rose 3 basis points to 5.1 percent. Loan demand remains historically weak, owners can t find many good reasons to borrow to invest when expectations for growth are not very positive. The net percent of owners expecting credit conditions to ease in the coming months was a negative 5 percent, a 1 point improvement. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to substantially step up their borrowing and spending.

5 3 NFIB Small Business Economic Trends Quarterly Report COMMENTARY The Federal Reserve decided not to help the economy by surprising markets with no change in the Fed Funds rate in September, adding to the large cloud of uncertainty. Instead the Fed indicated that China and other weak countries needed their support along with domestic players threatened by global weakness. Those concerns are being walked back by FOMC members in the face of widespread angst from all quarters. Living in their world of models, QE is supposed to work, hoarding trillions of dollars of risk free assets is supposed to be a positive. For some FOMC members, reality has not yet set in. One FOMC member even supports more QE. But, what would that accomplish other than adding to their already unnervingly large portfolio?. Owners make it clear that credit availability and costs are not holding them back. But 4 percent are significantly distressed about Fed indecisiveness and another 35 percent are somewhat concerned. More uncertainty is the enemy of small businesses. What does the Fed fear that few others seem to worry about? GDP growth languished in Q3, and will not likely impress in Q4. The industrial sector is weakening and the small business sector has not returned to its historical role in the production of GDP and jobs. The October NFIB survey gave no indication of a resurgence in growth in the small business sector, readings remaining below average. Consumer sentiment (University of Michigan) rose in October, but only to the second lowest reading for the year, not a great performance. The lowest reading was reached in September. The gain was driven by the low income segment as the top income group was apparently depressed by stock market gyrations. Over 6 percent reported hearing unfavorable news about the economy. Far more consumers think government policy is poor than think it is good (39 percent vs 16 percent). Over 2 percent of owners who think it is a bad time to expand blame political uncertainty. Supporting the views of her former boss, Hillary Clinton now blames the Middle East refugee problem on climate change, the cause of all bad things. This remains the center piece of President Obama s policy model and prospects for dealing with tax reform, the rising cost of health care, and the flood of capital-devouring regulations are dim. This will continue to depress growth in Q4 and into 216.

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 215 Reason Good Time Not Good Time Uncertain Economic Conditions Sales Prospects Fin. & Interest Rates 1 1 Cost of Expansion 5 4 Political Climate 12 9 Other/Not Available OUTLOOK FOR GENERAL BUSINESS CONDITIONS Net Percent ( Better Minus Worse ) Six Months From Now

8 6 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS EARNINGS EARNINGS Actual Last Three Months January Quarter 1974 to October Quarter Net Percent 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 215 Reason Current Month One Year Ago Two Years Ago Sales Volume Increased Costs* Cut Selling Prices Usual Seasonal Change Other * Increased costs include labor, materials, finance, taxes, and regulatory costs.

9 7 NFIB Small Business Economic Trends Quarterly Report SMALL BUSINESS SALES SALES Actual (Prior Three Months) and Expected (Subsequent Three Months) January 1974 to October 215 Net Percent Expected -3 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 SMALL BUSINESS PRICES Net Percent 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 215 Planned Higher 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 Percent "Good Time to Expand" (thick line) Percent "Better" Minus "Worse" Expected General Business Conditions (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 (Borrowers Only) 21 27/11 29/9 29/11 28/9 28/8 25/1 27/9 27/9 27/9 26/9 25/9 28/ /8 29/8 28/7 28/8 28/8 25/9 28/8 28/7 29/8 28/9 3/7 29/ /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 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 215 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 INVENTORY PLANS Net Percent ( Increase Minus Decrease ) in the Next Three to Six Months

18 16 NFIB Small Business Economic Trends Quarterly Report 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 Percent -5-1 Satisfaction Inventory Plans CAPITAL EXPENDITURES Actual Last Six Months and Planned Next Three Months January Quarter 1974 to October Quarter Percent 4 2 Actual Planned ACTUAL CAPITAL EXPENDITURES Percent Making a Capital Expenditure During the Last Six Months

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 2 2 CAPITAL EXPENDITURE PLANS Percent Planning a Capital Expenditure During Next Three to Six Months

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 215 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 215 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 SURVEY PROFILE OWNER/MEMBERS PARTICIPATING IN ECONOMIC SURVEY NFIB Actual Number of Firms Percent 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 FOUNDATION 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?