Home Economic Trends Drop in Small-Business Optimism Reflects Renewed Uncertainty – Robert Hughes (08/14/2020)

Drop in Small-Business Optimism Reflects Renewed Uncertainty – Robert Hughes (08/14/2020)

The small-business-optimism index from the National Federation of Independent Business fell 1.8 points to 98.8 in July versus 100.6 in June (see top of first chart). The latest result is the fourth month below 100 in the last five months. The index had posted a run of 39 consecutive months above 100 between December 2016 and February 2020.

Details within the report suggest that small-business owners have become a bit more uncertain about the potential for recovery. Resurging COVID-19 cases, political turmoil, and persistent consumer apprehension are smothering hopes for a rapid rebound. According to the report, “Much will depend on the terms of the new Congressional bailout, consumers’ reaction to it, and their general comfort with going back to work and going shopping.”

Within the details of the small business survey, the percentage of respondents believing now is a good time to expand came in at 11, down from 13 in June while the net percentage of respondents expecting better economic conditions (“better” minus “worse”) fell to 25 in July versus 39 in June (see bottom of first chart).

“A net negative 28 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 3 points from June but a terrible number,” according to the report (see bottom of first chart).  A net -5 percent expect higher sales over the next three months versus the prior three months, an improvement from the net -13 percent in June.

On a positive note, the percentage of firms planning to increase employment rose to 18 percent in July versus 16 percent in June and a high of 26 percent in August 2018. Surprisingly, 30 percent (versus a record 39 percent) of firms still report having openings they are not able to fill at the moment despite the surge in unemployment. The percentage of firms reporting few or no qualified applicants for job openings was 44 percent, up from 43 percent in June but still below the record 57 percent from August 2019. The results suggest there is a skills shortage in the U.S.

That skills shortage has 15 percent of firms saying they have already increased compensation over the past three months while 14 percent intend to increase worker pay over the coming months.

The skills shortage has pushed quality of labor back to the top of the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor again ranks first at 21 percent, 6 points below the survey high of 27 percent. Taxes were second at 18 percent while government regulation was third at 14 percent and red tape was fourth on the list at 13 percent (see second chart).

Twenty-six percent of firms have plans for capital expenditures over the next three to six months, up from 22 percent from the prior month. Forty-nine percent of small businesses have made capital expenditures during the past six months. That is well below the typical percentage in the upper 60s during the late 1990s and only slightly above the mid-40s percentages during the last recession. The most popular type of expenditure was equipment (33 percent) followed by vehicles (21 percent) and building/land improvement (13 percent). The most popular outlay range was $10,000 to $49,999.

Overall, the survey suggests the small-business sector of the economy has grown more cautious about the prospects for recovery though a shortage of skilled workers continues.