Small-Business Confidence Holding at a High Level

By Robert Hughes

The small-business-optimism index from the National Federation of Independent Business fell to 103.3 in June, down 1.7 points from 105.0 in May and 5.5 points below the all-time high of 108.8 in August 2018. Since first crossing the 100 level, the index has averaged 105.2 and extends a run of 31 consecutive months above 100, a very high figure by historical comparison (see top chart). The small drop in the latest month was primarily reflecting increased uncertainty, a decline in capital spending, higher prices due to compensation pressures and tariffs, and softening of sales expectations. 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. The report boldly claims “Main Street is strong.”

The general outlook remained positive as the percentage of respondents believing now is a good time to expand came in at 26, down from 30 in May. The net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 16, unchanged from May. A net 17 percent expect higher sales over the coming months while a net 7 percent report 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 May. A near-record 36 percent (versus a record 39 percent) of firms report having openings they are not able to fill at the moment (see bottom chart). At the same time, the percentage of firms reporting few or no qualified applicants for job openings was 50 percent, down from 54 percent in May and just 5 point below the record 55 percent from June 2018. That combination in the labor market of healthy demand and weak supply has a net 28 percent of firms saying they have already increased compensation over the past three months while 21 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 21 percent, four points below the survey high. Taxes were second at 18 percent while government regulation and red tape was third on the list at 13 percent. Inflation was at the bottom of the list, tied with finance and interest rates at just 2 percent. 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 eased a bit but remain solid, with 54 percent of such businesses having made capital expenditures during the past six months. That is slightly below the typical percentage in the upper 60s during the late 1990s but well above the mid-40s percentages during the last recession. Twenty-six percent of firms have plans for capital expenditures over the next three to six months, down from 30 percent in the prior month.

Overall, the survey suggests the small-business sector of the economy remains strong and views of the future, while slightly less optimistic, remain upbeat.

The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows the number of open positions in the economy was down slightly in May to 7.323 million from 7.372 million in April and about 303,000 below the record-high 7.626 million in November. Private job openings in the United States were nearly unchanged at 6.640 million in May versus 6.635 million in April. The industries with the largest number of openings were professional and business services (1.326 million), health care (1.194 million), accommodation and food services (934,000), and retail (816,000).

The job-openings rate, openings divided by the sum of jobs and openings, held at 4.9 percent for the private sector. That is just 0.3 percentage points below the all-time high of 5.2 percent. The highest openings rates were in accommodation and food services (6.1 percent), professional and business services (5.8 percent), and health care (5.5 percent).

A further sign of labor-market strength may be seen in the number of quits, which likely reflects confidence in the labor market. Quits totaled 3.210 million for the private sector in May versus 3.327 million in April. The layoffs rate, another key indicator for the labor market, was unchanged at 1.3 percent for private employers and is consistent with the historically low initial claims as a percentage of employment. 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. Despite slight declines for small-business sentiment and private-sector job openings, a strong jobs report for June affirms the conclusion that labor remains tight.

Sign up here to be notified of new articles from Robert Hughes and AIER.

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.