After rising to the highest level since 1983 in February, the NFIB’s small business optimism index fell nearly 3 points to 104.7 in March. The March print came in below market expectations, which called for only a moderate pullback to 107.
Eight of the main subcomponents fell on the month, with only two labor market indicators improving. The declines were more pronounced among those related to future performance, with expectations about an improvement in the economy, higher real sales and the belief that now is a good time to expand pulling back 11, 8 and 4 points to 32%, 20% and 28%, respectively. Still, all three remain healthy relative to historical trends.
Current conditions sub-components, such as current inventory (-3 points to -6%) and earning trends (-1 point to 4%), also pulled back, but by a lesser degree.
Hiring picked up on the month, with the average change in employment rising to 0.36 workers per firm from 0.22 previously, while hiring plans (+2 points to 20%) and job openings (+1 point to 35%) also improved. Readings from all three sub-indicators indicate some of the best performances in the survey’s history.
However, the supply of labor remains a soft spot. Nearly half of businesses (47%, unchanged) reported few or no qualified workers for job openings, while quality of labor concerns remained elevated at 21% (-1 point on the month; the dominant concern for the third straight month). On the other hand, concerns regarding taxes (13%), which have fallen 9 points since November, are now at the lowest level since 1982.
Businesses continued to boost worker compensation with the share of firms doing so rising to 33% (the highest reading outside of May and November 2000). Some of the rise in labor costs are being passed on down the supply chain, with the share of firms raising prices surging to 16% – more than triple last year’s level. The share of firms planning to raise worker compensation remained elevated at 19%, but is down 5 points from the nearly three-decade high of 24% in January. Meanwhile, the share of firms planning to raise prices rose 1 point to 25%.
The share of firms making capital outlay plans over the past six months fell from 66% in February to 58%, while plans to do so pulled back 3 points to 26%.
Key Implications
After rising to the highest level since 1983, some pullback in the confidence measure was likely to take place March. Still, the pullback was more acute than expected, with a part of the decline possibly related to rising trade tensions between U.S. and China – which appears to have affected expectations.
Trade tensions have led to rising uncertainty and may have resulted in a softening of recent capital expenditures as well as plans for future capital outlays. Still, we believe that a trade war is not in the cards, and tensions should ease. As they do, we expect the tightening labor market, together with the more competitive tax environment and profit repatriation to support capital investment going forward.
The fact that hiring and compensation trends continue to improve, while the willingness of businesses to hire additional workers remains intact, are all very encouraging elements. As businesses continue to grapple with worker shortages, they are expected to continue boosting worker compensation while also passing on some of the costs to other parts of the supply chain – trends evident in today’s report. This bodes well for a pickup in price pressures and strengthens the case for continued monetary policy tightening.
