The NFIB’s small business optimism index rose 0.1 points to 105.3. The August headline print came in above market expectations, which called for a slight pullback to 104.9. Readings above the 105 level have been recorded only during select periods, such as in the mid-2000s and 1983, with today’s print near record levels.
Movements among the sub-components were mixed with four posting a gain, five declining, and one remaining unchanged. Gains in expectations for higher sales led the way (+5 to 27 percent), followed by the belief that now is a good time to expand (+4 to 27 percent), and capital outlay plans (+4 to 32 percent). The latter marks the strongest reading since 2006. Moreover, earnings trends eased off one point but remained elevated at -11.
Most labor market indicators eased off on the month, but continued to hold up at a high level. Small businesses added jobs at a solid pace in August with the average change in employment per firm at +0.18 m/m, while plans to increase employment pulled back slightly (-1 to 18 percent). When stacked against past performance, both indicators are showing some of the best prints since the mid-2000s.
Job openings also pulled back, dropping 4 points on the month. But this followed a 5-point increase in the month prior, leaving the level of job openings at 31 percent – still one of the best showings since 2000. Over half of businesses seeking workers (52 percent) had few or no qualitied applicants, with ‘quality of labor’ concerns being the second most significant headwind to expansion (19 percent), right after taxes (20 percent).
Given already tight conditions, businesses continued to boost worker compensation (+1 to 28 percent). But plans to do so in the next three months pulled back for a second consecutive month, falling 1 point to 15 percent in August. The latter is still a decent reading but somewhat softer compared to the 18 percent recorded between March and June.
The net percent of owners raising average selling prices increased one point, rising to a net 9 percent – the highest level since 2014, while plans to do so in the near future fell back three points to a still-decent 20 percent.
Key Implications
Small business confidence has managed hold on to the post-election gains. While an improved view of future conditions has certainly played a part, the boost in optimism has not been solely due to a shift in the forward-looking indicators. In fact, businesses have also been reporting better nominal sales and earnings trends. This is in line with stronger demand and improved economic growth recently, particularly through the consumer spending channel.
The improvement in capital expenditure plans is particularly encouraging given that it marks the strongest reading since 2006. It appears that improved optimism is finally trickling down to investment intentions – a trend that if sustained is likely to boost business investment and lead to improved productivity.
On the other hand, the slightly softer trend in worker compensation plans is a disappointing signal for wage growth. Still, given increasingly tight labor market conditions, it is unlikely to continue. Moreover, the ‘share of owners that are raising prices’ that is now back at highest level since 2014 is another encouraging sign regarding inflation.
Disruptions from Hurricane Harvey do not appear to have played a large part in today’s report, given that the storm made landfall in Southeast Texas late in the month. Nonetheless, we anticipate some distortions to the data ahead, with the added impact of Hurricane Irma to augment volatility. Overall, downbeat sentiment among affected businesses is likely to weigh on the headline measure in the near-term, with a subsequent boost to economic activity as reconstruction efforts and a gradual return to normalcy work in the opposite direction.
