Small-Business Confidence and Job Openings Decline Slightly

By Robert Hughes

The small-business-optimism index from the National Federation of Independent Business fell slightly to 104.4 in December, down 0.4 points from 104.8 in November and 4.4 points below the all-time high of 108.8 in August 2018. The latest result extends a run of 25 consecutive months above 100, a very high figure by historical comparison (see top chart). Of the 10 individual indicators that make up the overall optimism index, 4 improved in the latest month while 6 pulled back. The single most important problem among small businesses remains the declining quality of the available labor force, particularly in the context of an already tight labor market and the very high percentage of firms with open jobs.

According to the National Federation of Independent Business’ chief economist, Bill Dunkelberg, “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates. However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

The general outlook remained positive as the percentage of respondents believing now is a good time to expand came in at 24, down from 29 in November. The net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 16, down from 22 in November but still high compared to negative numbers from 2016. A net 23 percent expect higher sales over the coming months while a net 4 percent reported higher sales for the most recent three months versus the prior three months.

The percentage of firms planning to increase employment rose to 23 percent from 22 percent in November. A record 39 percent of firms report having openings they are not able to fill at the moment. At the same time, the percentage of firms reporting few or no qualified applicants for job openings was 54 percent. That combination in the labor market of healthy demand and weak supply has a net 35 percent of firms saying they have already increased compensation over the past three months while 24 percent intend to increase worker pay over the coming months.

The labor-market dynamics have made quality of labor the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor ranks first at 23 percent. Government regulation and red tape was second on the list at 14 percent, while taxes and cost/availability of insurance tied for third at 13 percent. At the bottom of the list were inflation with just 1 percent and financing and interest rates, with just 3 percent saying these two were significant issues. Inflation has been at the bottom of the list for several years, reflecting the slow pace of price increases over the current cycle.

Capital expenditures by small businesses also remain solid, with 61 percent of such businesses having made capital expenditures during the past six months. That is below the typical percentage in the upper 60s during the late 1990s but well above the mid-40s percentages during the last recession. Twenty-five percent of firms have plans for capital expenditures over the next three to six months, down from 29 percent last month.

The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows the number of open positions in the private sector fell to 6.3 million in November. Total job openings dropped to 6.9 million (see bottom chart). The industries with the largest number of openings were professional and business services (1.18 million), health care (1.16 million), leisure and hospitality (1.01 million), and retail (848,000).

The job-openings rate, openings divided by the sum of jobs and openings, was 4.7 percent for the private sector, down from 4.9 percent last month. The highest openings rates were in accommodation and food services (6.1 percent), health care (5.5 percent), and professional and business services (5.3 percent).

A further sign of labor-market strength may be seen in the layoffs rate, which held at 1.3 percent for private employers. While slightly above the all-time low of 1.1 percent from March 2018, it is well below the 2.2 percent peak rate in 2009. The low layoffs rate is consistent with the multidecade-low level of initial claims for unemployment insurance. Combined, the high number of openings, the high openings rate, and the low layoffs rate all suggest the labor market remains very tight.

Overall, the data relating to the labor market continue to show strength. Payroll increases appear to be on a solid path, and layoffs remain low. The substantial number of open positions in the economy suggests wage gains may continue to experience upward pressure. Still, attracting and retaining qualified labor is likely to remain a critical issue for business in the immediate future.


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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.