Small Business Optimism Ebbs

Optimism among small business owners ebbed to the lowest level in 7 months, according to the Small Business Optimism Index, which fell 2.6 points in November to 104.8, below the Econoday consensus as well as the range of analysts' expectations. More than half of the decline stemmed from an 11-point drop to a net 22 percent in expectations that the economy will improve, and a drop in expected real sales, which fell 4 points to a net 26 percent. But the weakness was broad-based, with none of the 10 components posting an increase while 8 declined and 2 remained unchanged.

Even employment weakened, albeit still remaining the strongest among the components as current job openings dropped 4 points to a net 34 percent. However, the survey also showed that increases in compensation tied a near 30-year high as owners sought to attract more qualified candidates, with those planning to raise compensation rising 2 points from the previous month to a net 25 percent, the highest level since 1989. Finding qualified labor was deemed as the number 1 problem for their business by a net 25 percent of owners, a record for the survey.

Plans to increase inventories fell 3 points to a net 2 percent, while the net percent of owners viewing current stocks as too low also fell 3 points to minus 5, suggesting that the stocks of inventories are beginning to look excessive in light of the expected drop in real sales. But while expectations for the future declined, a net 9 percent of owners reported higher nominal sales in the past 3 month, up 1 point and historically very strong. More than 30 percent of owners of construction, manufacturing, retail, and transportation businesses reported quarterly improvement in sales.

Capital spending plans declined by 1 point to a net 29 percent, which however remains among the strongest readings of the recovery. And the percentage of small business owners reporting capital outlays was up 2 points from October at 61 percent, with 45 percent of these spending on new equipment, up by 2 points from the previous level, and 22 percent acquiring vehicles, down 4 points, while 15 percent bought new fixtures and furniture, up 1 point.

On the inflation front, the net percent of owners raising selling prices remained unchanged at 16, while a significant net 29 percent plan price hikes, up 1 point from October and the highest level since August 2008.

Although the November survey shows a weakening of optimism, it appears to reflect frustration with growth constraints brought about by a lack of qualified new labor, as well as with the associated impact of wage hikes on profit margins and higher selling prices, which is unlikely to bolster dovish arguments at the Federal Reserve.