from the National Federation of Independent Business

The Index of Small Business Optimism gained 3.7 points to 107.5 in November, the second highest reading in the 44-year history of the NFIB surveys (108.0 in July 1983).

[editor's note: Market expectation from Bloomberg/Econoday was between 104.0 to 105.9 (consensus 104.2) versus the actual reading of 107.5].

Said NFIB President and CEO Juanita Duggan:

We haven't seen this kind of optimism in 34 years, and we've seen it only once in the 44 years that NFIB has been conducting this research. Small business owners are exuberant about the economy, and they are ready to lead the U.S. economy in a period of robust growth.

Eight of the 10 Index components posted a gain and two declined, as Job Openings fell from its record high level and Capital Spending Plans declined 1 point. Eighty percent of the gain in the Index was accounted for by expectations about future business conditions and real sales gains, and the environment for business expansion.

Said NFIB Chief Economist Bill Dunkelberg:

This is the second-highest reading in the 44-year history of the Index. The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward four percent GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the weak 2009-16 recovery.

The change in the management team in Washington has dramatically improved expectations," he continued.

Job Creation plans increased six points last month, providing more evidence of a strong labor market. The number of owners who said it's a Good Time to Expand rose four points; Inventory Plans increased by three points; Inventory Satisfaction increased by three points; and Actual Earnings Trend moved up two points.

Job creation faded, but hiring plans soared, primarily in construction, manufacturing, and professional services.

Report Commentary:

President Trump promised that we would get tired of "winning" in his term, a logical perspective because the Republicans have majorities in both houses of Congress and the Presidency. There has been an important success on relief and in restructuring the judiciary, and they are now close to enacting tax reform as the year winds down.

The Federal Open Market Committee (FOMC) which conducts monetary policy is undergoing a major facelift. Although the appointment of Powell is viewed as replacing Yellen with "Yellen", that is not the case. Mr. Powell has extensive financial market experience, something few FOMC members possess, which will help guide policy decisions. The Federal Reserve charter calls for governors that represent the business sector, but such appointments are rare, dominated instead by academic economists. Two other new appointees are less philosophically disposed to the notion of government running the economy (rather than markets). More positions will open in the near future and these will be filled with governors who place a different emphasis on the goal of creating inflation, an anathema to most small-business owners. The Federal Reserve 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 Federal Reserve is still in control of rates and bond investors bet on the Fed, not markets.

The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4 percent GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the 2009-16 weak recovery under President Obama. The change in the management team dramatically improved expectations. There is still much uncertainty about health care and taxes, but it appears that owners believe that whatever Congress finally comes up with will be an improvement and so they remain positive.

Report Overview:

The Index of Small Business Optimism gained 3.7 points to 107.5 in November, the second highest reading in the 44-year history of the NFIB surveys (108.0 in July 1983). Eight of the 10 Index components posted a gain and two declined, as Job Openings fell from its record high level and Capital Spending Plans declined 1 point. Eighty percent of the gain in the Index was accounted for by expectations about future business conditions and real sales gains, and the environment for business expansion. Reports of higher selling prices inched up to the highest level since the 2014 bump in economic activity, perhaps in response to the steady reports of increases in worker compensation. Interest in borrowing remained subdued and complaints about credit availability stayed at historically low levels. Job creation faded, but hiring plans soared, primarily in construction, manufacturing, and professional services - these are not temporary seasonal jobs. Finding qualified workers was the second most important problem facing owners, only taxes polled higher. 2 Owners are set to increase inventory stocks, especially in manufacturing, the wholesale trades, and retailing, much of this seasonal in nature. Overall, a good environment for better than average economic growth in the fourth quarter.

Some other highlights of this Optimism Index include:

Labor Markets. After several solid quarters, job creation slowed in the small business sector as business owners reported a seasonally adjusted average employment change per firm of 0.0 workers. Thirteen percent (down 1 point) reported increasing employment an average of 3.0 workers per firm and 10 percent (down 1 point) reported reducing employment an average of 2.9 workers per firm (seasonally adjusted). Fifty-two percent reported hiring or trying to hire (down 7 points), but forty-four percent (85 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Eighteen percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (down 2 points), second only to taxes. This is the top-ranked problem for those in construction (33 percent) and manufacturing (22 percent), getting more votes than taxes and the cost of regulations.

Capital Spending. Fifty-nine percent reported capital outlays, unchanged. Of those making expenditures, 40 percent reported spending on new equipment (down 1 point), 29 percent acquired vehicles (up 5 points), and 16 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (down 1 point) and 13 percent spent money for new fixtures and furniture (up 1 point). Twenty-six percent plan capital outlays in the next few months, down only 1 point from October. Plans were most frequent in construction (31), agriculture (33 percent), and manufacturing (34 percent). Improvements in productivity depend crucially on investment spending in the labor-intensive small business sector. A tax bill that provides more certainty about expensing, tax rates, etc. will significantly improve the environment for capital spending.

Sales. 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 negative 5 percent, a 6-point decline from October. Consumer spending slowed in November, especially at "bricks and mortar" establishments. Seasonally adjusted, the net percent of owners expecting higher real sales volumes gained 13 points, rising to a net 34 percent of owners, consistent with reported surges in consumer sentiment from the University of Michigan and the Conference Board. Very positive sales expectations are undoubtedly behind the surge in hiring plans and inventory investment.

Inventories. The net percent of owners reporting inventory increases fell 2 points to a net negative 2 percent (seasonally adjusted). Even though sales were weak, owners still reduced their current inventory stocks. The net percent of owners viewing current inventory stocks as "too low" gained 3 points to a net negative 2 percent, a more positive view of current stocks. The net percent of owners planning to add to inventory rose 3 points to a net 7 percent, a solid figure that is supportive of fourth-quarter growth. The 7 percent readings from September and November are the best since 2006. Inventory investment has been a major contributor to the growth in GDP in the second half of the year.

Credit Markets. Four percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty-two percent reported all credit needs met (up 3 points) and 48 percent said they were not interested in a loan, down 5 points. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 16 percent citing regulations and red tape, and 18 percent the availability of qualified labor. Weak sales garnered 11 percent of the vote. In short, credit availability and cost is not an issue and hasn't been for many years. The important role of market interest rates is to allocate financial capital to its most valued uses. Historically, reports of changes in interest rates paid on loans suggest that markets performed this role. However, starting with 2008-2009, the volatility in interest rates flat-lined as the Federal Reserve took rates to the "0 bound". Price rationing became impossible, so the adjustment shifted to credit rationing, turning down loan applicants rather than pricing risk into the interest rate offered/charged. As the Federal Reserve lifts off the 0 bound, evidence that market interest rates maybe resuming their historical function appear in owner experiences with rate seeking in the market as reports of higher or lower rates have also risen from the "zero" level. Thirty percent of all owners reported borrowing on a regular basis (unchanged). The average rate paid on short maturity loans was down 30 basis points at 5.7 percent, little changed even as the Federal Reserve has been raising rates. Overall, loan demand remains steady, 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.

Compensation and Earnings. Reports of higher worker compensation were unchanged at a net 27 percent, historically very strong all year. 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. Owners complain at record rates of labor quality issues, with 85 percent of those hiring or trying to hire reporting few or no qualified applicants for their open positions. Eighteen percent selected "finding qualified labor" as their top business problem, far more than cite weak sales. Plans to raise compensation fell 4 points in frequency to a net 17 percent, still a solid number, but a surprise as labor markets seem to be getting tighter. The frequency of reports of positive profit trends improved 2 points to a net negative 12 percent reporting quarter on quarter profit improvements, a solid reading historically, among the best since 2007. Firms that survived the Great Recession and eight years of sub-par growth have learned how to make money in hard times and benefit at the bottom line when the economy suddenly picks up speed (3 percent or better growth).

Inflation. The net percent of owners raising average selling prices rose 2 points to a net 10 percent seasonally adjusted. Clearly, inflation is not "breaking out" across the country as the Federal Reserve hoped, but the percent of owners raising prices, net of those reducing, has doubled since January, a slow crawl to higher inflation. Unadjusted, 10 percent of owners reported reducing their average selling prices in the past three months (unchanged), and 17 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 23 percent plan price hikes (up 1 point), 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.

source: NFIB