from the National Federation of Independent Business

The Index of Small Business Optimism rose 1.6 percent in July to 105.2, a strong performance led by significant gains in hiring activity.

[editor’s note: Market expectation from Bloomberg/Econoday was between 103.0 to 105.9 (consensus 104.8) versus the actual reading of 105.3.]

Said NFIB President and CEO Juanita Duggan:

This is a sign of economic health that we’ve been expecting based on the soaring optimism that began last year. Higher optimism resulted first in higher employment activity, and now we’re seeing more small business owners making capital investments.

Consumer demand is very strong, and the regulatory relief has been dramatic. Small business owners still expect progress on tax reform and healthcare, and they will be watching closely.

Consumer demand is driving optimism, and optimism is driving business activity. Substantial regulatory relief is also a big factor because it creates a much more hospitable business climate.

Among the 10 components that make up the Index, seven improved, two declined, and one remained unchanged. The biggest gains were: job openings (+5); job creation plans (+4); and sales expectations (+5).

Said NFIB Chief Economist Bill Dunkelberg:

The August figures for capital outlays are typical of a growing economy.

Small firms are now making long-term investments in new machines, equipment, facilities, and technology. That’s a real sign of strength, and it will be interesting to see if the August result becomes a trend.

Report Overview:

The Index of Small Business Optimism rose 0.1 points to 105.3 in August, basically unchanged from July. Five of the 10 Index components posted a gain and five declined. The Index peaked for this recovery at 105.9 in January, just 0.6 points above the August reading. It is unlikely that progress in Washington D.C. is the source of continued owner optimism because there isn’t any on the major issues of health care and tax reform. So owner optimism is more like a “relief rally”, relief that they did not get another four years of costly federal regulations which increased the hold of government on the private sector. The Congressional Record is nearly empty compared to years of record new and changed regulations posted for the past eight years.

Labor market indicators point towards a likely continuation of good jobs reports. Reports of increases in compensation remained at historically high levels. The frequency of reported price increases was the highest since 2014, but still historically low. Inventory investment plans faded but were still solid. Reports of capital outlays surged along with the percent of owners viewing the current period as a good time to expand. Expectations of higher real sales posted strong gains, anticipating a stronger second half of 2017.

Some other highlights of this Optimism Index include:

Labor Markets. Small business owners reported a seasonally adjusted average employment change per firm of 0.18 workers per firm over the past three months, virtually unchanged from July. Fourteen percent (up 1 point) reported increasing employment an average of 4.4 workers per firm and 12 percent (up 1 point) 3 reported reducing employment an average of 2.4 workers per firm (seasonally adjusted). Fifty-nine percent reported hiring or trying to hire (down 1 point), but 52 percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Nineteen percent of owners cited the difficulty of finding qualifed workers as their Single Most Important Business Problem (unchanged), second only to taxes. Labor quality is the top ranked problem in Construction (33 percent) and Manufacturing (25 percent), receiving more votes than taxes and regulatory costs. The most typical reason for “disqualification” of an applicant was a lack of specific job skills (cited by 26 percent of employers), followed by a poor work history (16 percent). Poor English and math skills typically disqualified 10 percent of the applicants. A lack of social skills disqualified 14 percent, unreasonable wage expectations 14 percent, attitude 12 percent, and appearance 8 percent, all factors that the applicant could easily improve without additional training if they really wanted a job. Drug issues were a typical reason for disqualification for 10 percent of the owners and legal status for 6 percent. Thirty-one percent of all owners reported at least one job opening they could not fill in the current period, down 4 points but a very high reading. Thirteen percent reported using temporary workers, down 1 point. Reports of job openings were most frequent in Construction (54 percent), Manufacturing (37 percent) and Retail (34 percent). A seasonally adjusted net 18 percent of owners plan to create new jobs, off 1 point from July but historically very strong. Not seasonally adjusted, 20 percent plan to increase employment at their firm (down 1 point), and 6 percent plan reductions (up 1 point). Hiring plans were strongest in Construction and Manufacturing where job openings are most frequent. Residential construction would be stronger if builders were able to find more qualified workers and fill their open positions.