The NFIB’s small business optimism index increased slightly by 0.1 points to 101.8 in March, keeping it above its historical average of 98. The modest improvement however, disappointed market expectations for a 102 point reading.
Movements among the survey’s subcomponents were marginally positive this month, with five improving, three declining and two remaining unchanged. Firms expecting higher real sales increased by three points, while those planning to increase employment rose by two points. The percent of firms with positions they were unable to fill also rose by two points. On the other hand, firms who thought inventories were too low pulled back by four points.
Expectations of improving economic conditions (+11%) and plans for capital expenditures (+27%) were unchanged from the previous month.
Labor market indicators were mixed. The net addition of workers per firm came off an all-time high reached in February, but still remained elevated, while job openings rose two points to 39%. Additionally, quality of labor concerns, though declining (-1 point to 21%), remained the top problem facing small businesses.
After retreating in February, the number of firms planning to increase employment increased by two points to 18% in March. Firms who raised compensation (33%) and those planning to raise compensation in the next three months (20%) both advanced by two points. Firms, however, continued to face headwinds as the percent reporting few or no qualified applicants for open positions rose five points to 54%.
Key Implications
The slip in small business confidence following the government shutdown does not seems to have caused long-lasting harm to business optimism. In fact, the Uncertainty Index declined by six points to 79, which is a more normal reading for the index in recent years.
The report shows that tightness in the labor market is a real issue for small businesses. The return to solid job gains in March’s national employment report, while encouraging, is likely to become more difficult to sustain, given this challenge.
All said, the recent incremental gains in the index implies solid growth, but at a more staid pace than the fiscal-stimulus-fueled past year. This is not necessarily a bad thing. With a ‘Goldilocks’-like rate of growth, inflation pressures will remain benign and policy supportive of a prolonged economic expansion.
