Today’s Outside the Box is a report that most of you have read about or seen quoted but have never actually seen directly. It is the National Federation of Independent Businesses (NFIB) Small Business Economic Trends monthly report, which they have done since 1973. It was at first a quarterly and then switched to a monthly in 1985. It is thus a continuous record of the ups and downs of small business trends and moods, and is a great barometer of the economy. The man in charge of the index, my good friend Dr. William (Dunk) Dunkelberg, has been doing this seemingly forever and is a font of knowledge about small business. The report itself is straightforward and not very long, and I go through it every month. You can get a feel over time of how things are
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Today’s Outside the Box is a report that most of you have read about or seen quoted but have never actually seen directly. It is the National Federation of Independent Businesses (NFIB) Small Business Economic Trends monthly report, which they have done since 1973. It was at first a quarterly and then switched to a monthly in 1985. It is thus a continuous record of the ups and downs of small business trends and moods, and is a great barometer of the economy.
The man in charge of the index, my good friend Dr. William (Dunk) Dunkelberg, has been doing this seemingly forever and is a font of knowledge about small business.
The report itself is straightforward and not very long, and I go through it every month. You can get a feel over time of how things are changing. For instance, right now the number one problem for small businesses is finding employees with the right skills that they need for their jobs. That jives with the findings of other big business surveys and other data that talks about a massive skills mismatch between those who are looking for jobs and those who want to find employees.
My friend John Burns, who is one of the finest analysts of housing and new home construction in the country, talks about how many new homebuilders are seriously hampered from expanding because of how hard it is to get skilled labor. The problem is, much of their skilled labor has gone back south of the border, and the allure of being a carpenter or working in one of the associated trades dosn’t seem to capture the imagination of many young people today. And of course, there is a matter of training. John points out that carpenters and related tradespeople are making less than they did in 1973 on an inflation-adjusted basis, and has told employers that if they want to find people they’re going to have to start raising their pay. Which is not exactly what they want to do, given the low margins in the homebuilding business already. What to do, what to do?
Anyway, today’s report, all in all, is pretty upbeat. Fifty-nine percent of small businesses are trying to hire workers, although 88% of those businesses said that there were few or no qualified applicants for the positions they were trying to fill. I think we need to start experimenting with government apprenticeship programs rather than continuing to focus on all of the classroom training. It would certainly be more practical and actually cost less money.
I leave tomorrow evening for Lugano, Switzerland, where I will spend five nights, with a few evenings spent exploring the town. You actually fly into Milan, Italy, and it’s a quick car ride from there. I’ve been all over Switzerland but never to the Italian part, so I’m looking forward to this. I get back the Wednesday before Thanksgiving – just in time to cook for a large number of people. In addition to family and friends, Shane and I invite those in the building who have nowhere to go to come, sit down, share a grand feast, and enjoy themselves. Thanksgiving is one of my favorite holidays, if not my very favorite.
And with that I wish you a great week.
Your happy to send something positive analyst,
John Mauldin, Editor
Outside the Box
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(Based on 1,513 respondents to the October survey of a random sample of NFIB’s member firms, surveyed through 10/30/17)
The Index of Small Business Optimism gained 0.8 points to 103.8 in October, maintaining a streak of robust readings. Four of the 10 Index components posted a gain, 5 declined and one was unchanged. Labor market indicators point to continued good jobs reports, as reports of actual employment gains for October posted solid numbers and reports of job openings surged to record territory. Reports of increased compensation remained strong, the incidence of reported price increases rose a bit, good news for the Fed which wants more inflation. Plans to spend on inventory and capital projects didn’t advance but held at solid levels.
Owners became much more optimistic about the environment for expansion, which implies a more positive longer-run view. In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year. The net percent of owners reporting positive sales trends did not improve but did remain positive. Overall, the NFIB owners are in synch with the improving economy, although the 3 percent growth figure overstated the strength of domestic spending thanks to strong inventory growth (we paid to make it but didn’t sell it yet) and stronger exports.
[Column 1 is the current reading, column 2 the change from the prior month, column 3 the percent of the total change in the Index accounted for by each component; “*” means the percent <0.5% or not a meaningful calculation. Index is based to the average value in 1986, components are not. The term “net” means that the percent of owners giving an unfavorable answer has been subtracted from the percent of owners giving a positive or favorable response. For some questions, there is no “unfavorable” response category]
Job creation strengthened in the small business sector as business owners reported a seasonally adjusted average employment change per firm of 0.17 workers. Fourteen percent (up 2 points) reported increasing employment an average of 3.5 workers per firm and 11 percent (down 2 points) reported reducing employment an average of 2.2 workers per firm (seasonally adjusted). Twenty percent of Florida/Georgia respondents reported increasing employment and fifteen percent in Texas (not seasonally adjusted, small sample size), both above the sample average as expected.
Thirty-five percent of all owners reported job openings they could not fill in the current period, up 5 points and at record-high levels. Fourteen percent reported using temporary workers, up 3 points. Reports of job openings were most frequent in construction (49 percent), manufacturing (48 percent) and non-professional services (30 percent). Forty-two percent of Florida respondents reported unfilled job openings (not seasonally adjusted, small sample) as might be expected. Irma’s path of destruction covered the entire state adding substantially to the demand for labor.
A seasonally adjusted net 18 percent plan to create new jobs, down 1 point from September’s strong reading. Not seasonally adjusted, 19 percent plan to increase employment at their firm (down 1 point), and 7 percent plan reductions (up 1 point). Hiring plans were strongest in construction (22 percent), manufacturing (25 percent) and the wholesale trades (27 percent). With labor shortages already constraining the construction of new homes, finding labor for reconstruction in Texas, Florida, Puerto Rico and the Virgin Islands is problematic.
Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 1 point), and 16 percent improved or expanded facilities (up 3 points). Seven percent acquired new buildings or land for expansion (up 1 point) and 12 percent spent money for new fixtures and furniture (unchanged).
The percent of owners planning capital outlays was unchanged at 27 percent. The recovery from the hurricanes will undoubtedly raise these numbers. Plans were most frequent in construction (27), professional services (34 percent), the wholesale trades (31 percent), and manufacturing (38 percent).
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a net 1 percent, unchanged from September. Consumer spending slowed at the end of the third quarter and hurricanes definitely depressed shopping in large parts of the country. Recovery activities should add some energy to sales in the fourth quarter, especially vehicles and home improvement.
Seasonally adjusted, the net percent of owners expecting higher real sales volumes lost 12 points, falling to a net 15 percent of owners, this after large gains in July and August. What triggered such a large decline in expectations is less clear, as reports on the economy (e.g. 3.1 percent GDP growth in the second quarter etc.) were fairly good. Respondents in Florida and Texas were no less optimistic than their counterparts in the rest of the country.
The net percent of owners reporting inventory increases rose 2 points to a net 0 percent (seasonally adjusted). Inventory building did occur for the economy as a whole, but in the form of reduced rates of depletion in the small business sector.
The net percent of owners viewing current inventory stocks as “too low” lost 2 points to a net negative 5 percent, a less positive view of the need for current stocks. This is a bit surprising in light of the rather positive view of real sales trends in the next 3 months.
The net percent of owners planning to add to inventory fell 3 points to a net 4 percent, a solid figure that is supportive of fourth quarter growth.
The net percent of owners raising average selling prices rose 2 points to a net 8 percent. Clearly, inflation is not “breaking out” across the country as the Federal Reserve hoped. Ten percent of owners reported reducing their average selling prices in the past three months (unchanged), and 16 percent reported price increases (up 1 point), illustrative of the dynamics of price adjustments in the private sector to changes in economic conditions and demand.
Seasonally adjusted, a net 22 percent plan price hikes (up 3 points), although far fewer will report actually doing so in the following months.
The Federal Reserve has operated with a view that rising wages (or labor costs) will always produce inflation. Although there is a positive correlation between labor cost increases and price increases, it is not perfect, indicating that there are other intervening factors that shape just how quickly labor costs are passed on to customers in higher prices.
Compensation and Earnings
Reports of higher worker compensation rose points to a net 27 percent, historically strong. The Federal Reserve is hoping this will result in inflation as owners pass these costs on in the form of higher selling prices, but to date, their wish has not been granted to any significant degree.
The frequency of reports of improved profit trends deteriorated 3 points to a net negative 14 percent reporting quarter on quarter profit improvements, not great but historically OK.
Four percent of owners reported that all their borrowing needs were not satisfied, up 2 points and historically low. Twenty-nine percent reported all credit needs met (down 4 point) and 53 percent said they were not interested in a loan, up 2 points. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 14 percent citing regulations and red tape, and 20 percent the availability of qualified labor. Weak sales garnered 10 percent of the vote. In short, credit availability and cost is not an issue and hasn’t been for many years.
Thirty percent of all owners reported borrowing on a regular basis (up 1 point). The average rate paid on short maturity loans was up 40 basis points at 6.0 percent, little changed even as the Federal Reserve has been raising rates. Overall, loan demand remains historically weak, even with cheap money. Small businesses have been restructuring over the past ten years, profit trends have been historically good, and owners are in a good position to borrow once they have a good reason to do so.
The Larger Perspective
The preliminary estimate of third quarter growth came in at 3 percent, but this figure will be revised several times before the “official” figure is reported. It was virtually unchanged from the 3.1 percent growth for the second quarter. Domestic spending was weaker, closer to a2 percent rate of growth. Residential spending faltered a bit, perhaps due to supply constraints (labor), not weaker demand.
The Fed will boost rates again in December, but that will leave the Federal Funds rate at about half of the level that history would suggest. The Fed is still in control of rates and bond investors bet on the Fed, not markets.
NFIB began surveys of its membership in October 1973. Surveys were conducted in the first month of each quarter through 1985 when monthly surveys were instituted. The first month in each quarter is based on between 1,200 and 2,000 respondents, while the following two monthly surveys contain between 400 and 900 respondents. The term “net percent” means that the percent of owners giving an unfavorable response has been subtracted from the percent giving a favorable response. If, for example, 20 percent reported that they were going to increase the number of workers at the firm and 5 percent reported an intention to reduce the number of workers, the “net percent” would be 20 percent – 5 percent or a net 15 percent planning to expand employment. These figures are seasonally adjusted unless noted. The graphs show quarterly data (first survey month in each quarter), updated when available by subsequent monthly surveys.