The 2020 Mid-Year Economic Update_long

NFIB Small Business Optimism Rises in February

Job growth continues to be positive despite unfavorable conditions.

The NFIB Small Business Optimism Index rose 0.1 points to 98 in February, a solid result despite some unfavorable conditions.

"In spite of slow economic activity and awful weather in a lot of the country, small business owners are finding reasons to hire and spend which is great news," said NFIB Chief Economist Bill Dunkelberg.

NFIB owners increased employment by an average of 0.16 workers per firm in February (seasonally adjusted), unchanged from January. Fifty-three percent of owners reported hiring or trying to hire (up 5 points), but 47 percent reported few or no qualified applicants for the positions they were trying to fill. Twelve percent reported using temporary workers, down 2 points. A net 12 percent are planning to create new jobs, down 2 points but a solid reading. 

Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 3 points and the highest reading since April 2006. Fourteen percent cited the availability of qualified labor as their top business problem, the highest since September 2007. The job openings figure is one of the highest in 40 years and this suggests that labor markets are tightening and that there will be more pressure on compensation in the coming months.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months fell to a net negative 6 percent. After a 5 point decline in January, this indicator has returned to the low for 2014 reached in March of last year. Expected real sales volumes posted a 1 point decline, falling to a net 15 percent of owners expecting gains, after a 4 point decline in January. Sales prospects are still looking reasonably good to owners, just not as hot as in the fourth quarter last year.

The pace of inventory change remained positive, with a net 2 percent of all owners reporting growth in inventories (seasonally adjusted), unchanged from January. This is the fourth non-negative month in a row, and the first string of positive numbers since early 2007. 

Sixty percent reported outlays, up 1 point from January and the strongest reading since October 2007. The percent of owners planning capital outlays in the next 3 to 6 months was unchanged at 26 percent, the third best reading for this expansion but still weak historically. Of the 43 percent of owners who said it was a bad time to expand, 23 percent still blamed the political environment (up 4 points). 

Earnings trends were unchanged at a net negative 19 percent (net percent reporting quarter to quarter earnings trending higher or lower). After surging in December, reports of increased labor compensation dropped 5 percentage points to a net 20 percent of all owners. Labor costs continue to put pressure on the bottom line but energy prices are down a lot. Four percent reported reduced worker compensation and 26 percent reported raising compensation. This should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent of owners plan to raise compensation in the coming months (up 2 points). 

"Large firms have been powering the economic recovery since the Great Recession, but that may be shifting to the small business sector," said Dunkelberg. "February’s data suggests there are fundamental domestic economic currents leading business owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output."

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