Small Business Optimism Bounces Back

The highest earnings improvement levels in 45 years helped support small business optimism in April after a sharp decline in the previous month, according to the National Federation of Independent Business (NFIB), whose monthly Small Business Optimism Index ticked up by 0.1 point in April to 104.8, roughly in line with the consensus forecast. Leading the monthly index marginally higher was a 3-point increase in actual earnings trends to a net minus 1 percent, driven by gains in productivity, stronger sales and the newly implemented tax law. Capital expenditure plans also improved by 3 points to a net 29 percent, with current capital outlays driven by new equipment spending and the acquisition of vehicles, while plans call for increased spending on training and labor-saving technology.

But while showing a slight improvement overall, small business optimism presented a mixed picture in April, as 4 of the 10 components of the index rose, 3 fell, and 3 remained unchanged from the previous month.

Among the positives was higher inventory satisfaction, with the net percent of owners viewing current stocks as too low rising 2 points to a minus 4 percent. Sales expectations also gained ground, rising 1 point to a net 21 percent, as 59 percent of construction firms and 56 percent of manufacturing firms expected higher sales volumes in the coming months, encouraged by wage growth and solid consumer sentiment.

Though labor markets remained strong and owners reported adding a net 0.28 workers per firm on average, the third highest reading since 2006, it was job creation plans that led the declining components, falling 4 points to a historically still strong net 16 percent. But job markets remained very tight, as 35 percent of owners reported job openings they could not fill, unchanged from March and matching the highest reading since November 2000. Labor quality remained the number 1 problem for the fourth consecutive month, and shortages were reported for skilled as well as unskilled workers, with nearly half of the firms reporting unfilled openings in some industries, particularly in construction and manufacturing.

Expectations of better business conditions also decreased, falling 2 points, albeit to a still high net 30 percent, and the net percent of business owners with the view that now is a good time to expand fell by 1 point to 27 percent.

Overall, with a reading that has been higher only 20 times out of the last 433 readings, small business owners were clearly still very optimistic about their businesses in the April survey, though less exuberant than in February, when the level was the second highest in the survey's 45-year history.