Small Business Optimism Index Falls As Expected

The Small Business Optimism Index fell 0.9 points in September to 107.9, retreating as expected after August's record reading but still posting the third highest level in the survey's 45-year history. Leading the decline were the 3 measures which led the August increase, with plans to increase inventories falling 7 points to a net 3 percent, while plans to make capital outlays and plans to increase employment each shed 3 points to a net 30 percent and net 23 percent, respectively.

Smaller declines were also posted by 3 other components of the 10 making up the index, including earnings trends, which fell 2 points to minus 1 percent. Expectations that the economy will improve and that now is a good time to expand both retreated by 1 point to a still very strong net 33 percent each.

Bucking the downturn in September was a 3-point increase in expectations of higher retail sales to a net 29 percent, and the net of business owners judging current inventories to be "too low" rose 2 points to minus 1 percent. Expected credit conditions also gained 1 point to a net minus 5 percent. Interestingly, only 3 percent of owners reported that all their borrowing needs were not satisfied, which is just 1 point higher than the historic record low.

Of note is that actual investment spending improved in September, with 60 percent of owners reporting capital outlays, up 4 points from August. Of those making expenditures, 41 percent reported spending on new equipment, up 2 points from August, 26 percent acquired vehicles, up 4 points, and 16 percent improved or expanded facilities, down 2 points.

On the employment front, despite the monthly decrease in plans to increase employment, a net 38 percent of business owners reported job openings they could not fill in the current period, unchanged from the August survey, while 61 percent reported hiring or trying to hire, with 87 percent of those reporting few or no qualified workers. A record net 37 percent of owners reported raising overall compensation, up 5 points from August and surpassing the previous record of net 35 percent set in May.

Aside from compensation costs, inflation remains subdued among small business owners, with the net percent of owners raising average selling prices dropping 2 points in September to a seasonally adjusted net 15 percent.

Overall, the September survey shows small business owners continuing to expand their activities for the 23rd month in a row and at a pace not seen in decades, with expectations of further growth only slightly marred by a lack of qualified workers in a very tight labor market.