February Small Business Optimism at Near-Record High

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The National Federation of Independent Business (NFIB) Tuesday morning reported that its small business optimism index for February rose by 0.7 percentage points from 106.9 in January to come in at 107.6. The consensus estimate from economists called for the index to increase by 0.2 percentage points to 107.1.

The February index is the second-highest ever, trailing only the 108 reading posted in 1983. For 2017, the average monthly index was 104.8, the highest ever. The previous annual record was 104.6 set in 2004.

The four “hard” measures of the index posted mixed results last month. The job creation component dipped two points month over month in February to 18%, the job openings component was unchanged at 34%, capital spending plans also remained unchanged at 29%, and inventory investment plans rose by a point to 4%.

Some 31% of small business owners reported raising employees’ pay in the past three months, the highest reading since 2000. That’s up four percentage points on a seasonally adjusted basis from both November and December. Since January of 2017, net compensation changes have increased by one percentage point. Some 24% of small business owners are planning to raise wages in the next three months, up a point month over month and up six points compared to January 2016.

In its comments on the report, NFIB noted:

The small business sector is on fire. The pickup in capital spending is a very favorable sign, as capital spending (crucial for improved productivity) fell way behind from 2009 to 2016. Improved capital spending signals increased confidence in the future of the economy. Hiring is excellent and would be stronger if the labor market were not so tight. This is and will be a major constraint on growth. Inventory investment is strong and will add to GDP this quarter, hopefully it will be purchased later in the year by customers. Inflationary pressures from Main Street are minimal although reported hikes in average selling prices have been edging up

The NFIB reports that 34% of business owners currently have positions open that they are unable to fill (unchanged from January and up two points compared to February 2016) and that 47% said there were few or no qualified applicants for the open positions, down two points from the prior month’s total and three points more than in February of last year.

Business owners said their single most important problem is quality of labor (22%) followed by taxes and government regulations and red tape (each at 15%). Cost/availability of insurance (12%) and poor sales (11%) were the third and fourth most-cited problems. The least important problems are inflation and financing/interest rates (each at 2%).