– February 11, 2020
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The small-business-optimism index from the National Federation of Independent Business rose to 104.3 in January, up 1.6 points from 102.7 in December and it is now 4.5 points below the all-time high of 108.8 in August 2018 (see top chart). The latest result extends a run of 38 consecutive months above 100, averaging 104.9 over the period, a very high figure by historical comparison (see top chart). However, some of the components suggest less clarity about the outlook.

The percentage of respondents believing now is a good time to expand came in at 28, up from 25 in December. However, the net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 14, down from 16 in December. The net percentage expecting better economic conditions had been in the 40s in 2017 but has trended significantly lower over the last two years (see top chart).

Despite a deteriorating economic outlook, a net 23 percent expect higher sales over the coming months, up from 16 in December and 13 in November. Yet, a net 7 percent report higher sales for the most recent three months versus the prior three months, down from 9 percent in December and 12 percent in November (see bottom chart). Historically, actual sales appear to run below expected sales, perhaps suggesting a degree of persistent excessive optimism when it comes to sales expectations.

The percentage of firms planning to increase employment held at 19 percent in December. A near-record 37 percent (versus a record 39 percent) of firms report having openings they are not able to fill at the moment. This is somewhat contradictory to the latest job openings data from the Bureau of Labor Statistics which shows a markedly lower number of job openings over the past two years, though the total number is still high by historical comparison. At the same time, the percentage of firms reporting few or no qualified applicants for job openings was 49 percent, down from 50 percent in December and now 7 points below the record 57 percent from August. Though the labor indexes are off from the peaks, the labor market remains tight.

The combination of healthy labor demand and weak supply has a near-record net 36 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 26 percent, one point below the survey high of 27 percent. Taxes were second at 17 percent while government regulation and red tape was third on the list at 13 percent. Inflation along with financing and interest rates were at the bottom of the list with just 1 percent of respondents identifying them as the single most important problem. Inflation has been at the bottom of the list for several years, reflecting the slow pace of price increases over the current economic cycle.

Capital expenditures by small businesses also remain solid, with 63 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-eight percent of firms have plans for capital expenditures over the next three to six months, unchanged from the prior month.

Overall, the survey suggests the small-business sector of the economy remains relatively robust, but some aspects of the future are marginally less optimistic.

Robert Hughes

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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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