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 103.1 in August, down 1.6 points from 104.7 in July and 5.7 points below the all-time high of 108.8 in August 2018. The latest result extends a run of 33 consecutive months above 100, a very high figure by historical comparison. Of the 10 individual indicators that make up the overall optimism index, 3 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 (see chart), particularly in the context of an already tight labor market and the very high percentage of firms with open jobs.

The general outlook remained positive as the net percentage of respondents believing now is a good time to expand came in at 26, unchanged from July. The net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 12, down from 20 in July but still high compared to negative numbers from 2016. A net 17 percent expect higher sales over the coming months while a net 6 percent reported higher sales for the most recent three months versus the prior three months.

The percentage of firms planning to increase employment fell to 20 percent from 21 percent in July. A near-record 35 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 57 percent. That combination in the labor market of healthy demand and weak supply has a net 29 percent of firms saying they have already increased compensation over the past three months while 19 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 27 percent, a record high (see chart). Government regulation and red tape was tied with taxes for second on the list at 14 percent. At the bottom of the list were inflation with just 1 percent and financing and interest rates with just 2 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 59 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-eight percent of firms have plans for capital expenditures over the next three to six months, unchanged from the prior 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 slightly to 6.555 million in July. Total job openings dropped to 7.217 million. The industries with the largest number of openings were professional and business services (1.247 million), health care (1.171 million), leisure and hospitality (942,000), and retail (865,000).

The job-openings rate, openings divided by the sum of jobs and openings, was 4.8 percent for the private sector, unchanged from the prior month. The highest openings rates were in information industries (5.7 percent), accommodation and food services (5.5 percent), health care (5.4 percent), and professional and business services (5.5 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, 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 have been marginally weaker recently but continue to show fairly solid results. The August jobs report was mixed with slowing jobs growth but gains in average hourly earnings and the length of the workweek. The unemployment rate remains very 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.