We’ve had a lot to say about small business optimism before, and yet there is never enough thought on the matter. While small business optimism rose slightly in October to 102.4 from 101.8 in September, it has stalled compared to the yearly average. Despite being at a solid level, small business optimism is 4.25 points lower than in 2017 and nearly 2 points lower than 2016. While higher than the Obama administration, U.S. small business sentiment is at its lowest level during the Trump administration.
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Labor Indicators Appear to Have Peaked as Optimism Stalls
All three indicators of hiring have peaked or plateaued. Net hiring is down from 0.52 workers/firm in February to 0.12 in October. Planning to hire metrics also appear to have peaked in early 2019.
Sixty percent reported hiring or trying to hire (up 3 points), but 53 percent (88 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill – The National Federation of Independent Business
It’s also clear from the number of job openings that finding qualified labor continues to be a challenge. We’ve discusses ways of trying to eliminate bias as a potential solution to chronic shortages. Also, it is unclear, but likely that our severe drop in immigration has dried up a potential pool of workers, thereby hampering our growth. And as growth stalls, so too does optimism.
Tight Labor is Putting Pressure on Compensation & Earnings
Higher worker compensation rose to a net 30% across all firms. With a tight labor market, compensation is the most likely, but not the only way to attract and retain qualified worker. As we‘ve mentioned before, employees are motivated by more than just salary. The majority of companies rely solely on compensation, which has a negative impact on earnings given counter inflationary price pressures. Earnings peaked in early 2018, and they have been in a downward slide since.
Trade Policy is Negatively Affecting Capital Spending
We have written numerous blog post about our point of view on the current trade war stance, and it’s negative impact on small business. According to NFIB survey, others feel the same.
Trade policy is impacting many small firms adversely; about 30 percent recently reported negative impacts. Making commitments about production and distribution will be more difficult until import and export prices are stabilized with trade agreements. – NFIB
Hopefully, the pressures of an election year will allow for a cooling of tensions, but we will have to wait and see. As of now, it has left us in a standstill as small business optimism is in a holding pattern
Positive Tail Winds: Credit, Sales, and Inflation
Credit availability and inflation are the two positive spots in this report. Sales are strong, but uncertainty is holding it back from its full potential. Another set of effects of a stall in optimism, but one that could have a more positive result.
4% of business reported higher sales in past three months, up 2 points. In addition, 17% of owners expect higher sales in the next 3 months. Sales have been steady, but there is significant uncertainty due to the action by the Fed, recession worries, and political chaos in Washington.
Owners reporting that their credit needs were not met or that credit was harder to get are both at record lows. Nearly 40% said that all their credit needs met, and 55% were not interested in or needed credit.
“On balance, inflationary pressures are weak on Main Street as confirmed by government inflation reports.” -NFIB
It’s hard to argue that policy isn’t affect small business health. Both the trade war and immigration policy appear to be self-inflicted wounds. Both are acting to negate the positive tailwinds driving optimism. Until these are corrected, one would expect optimism to stand still.