– October 8, 2019
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The small-business-optimism index from the National Federation of Independent Business fell slightly to 101.8 in September from 103.1 in August. The latest result extends a run of 34 consecutive months above 100, a very impressive performance by historical comparison, but the index is also down 7.0 points from the all-time high of 108.8 in August 2018 (see top chart).

According to NFIB President and CEO Juanita D. Duggan, “As small business owners continue to invest, expand, and try to hire, they’re doing so with less gusto than they did earlier in the year, thanks to the mixed signals they’re receiving from policymakers and politicians. All indications are that owners are eager to do more, but they’re uncertain about what the future holds and can’t find workers to fill the jobs they have open.” Furthermore, NFIB Chief Economist William Dunkelberg adds, “As more owners become unsure, caution will seep into business decisions. In addition to tariff concerns, the Fed’s decision to cut interest rates raised uncertainty. Perhaps the country will indeed talk itself into a recession, but not anytime soon. The persistence of unfilled job openings and reports of a deficiency of job applicants indicate that there is still substantial economic optimism about the economy on Main Street.”

Of the 10 individual indicators that make up the overall optimism index, 7 declined in the latest month while 3 were unchanged. 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 general outlook remained positive as the percentage of respondents believing now is a good time to expand came in at 22, down from 26 in August. The net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 9, down from 12 in August but still solid compared to negative numbers from 2016. A net 16 percent expect higher sales over the coming months.

The percentage of firms planning to increase employment fell to 17 percent from 20 percent in August (see bottom chart). Thirty-five 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 57 percent, a new record high (see bottom chart). That combination in the labor market of healthy demand and weak supply has a net 18 percent intending 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 new record high.

Capital expenditures by small businesses also remain solid, with 57 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-seven percent of firms have plans for capital expenditures over the next three to six months, down 1 percent from the prior month.

Overall, the survey suggests the small-business sector of the economy remains solid, but uncertainty about the future is rising.

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Robert Hughes

listpg_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.
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