The NFIB Small Business Optimism Index remained basically unchanged in December, drifting down 0.4 points to 104.4. Unfilled jobs and the lack of qualified applicants continue to be a primary driver, with job openings setting a record high and job creation plans strengthening. Reports of higher worker compensation remained near record levels and inventory investment plans surged. Expected real sales growth and expected business conditions in the next six months, however, accounted for the modest decline in the Index.

“Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.”

A recent historical perspective:

• Actual hiring strengthened to the highest reading in six months, job openings are at a record high levels, and plans to create new jobs are down only three points from August’s record high.
• The net percent of owners expecting better business conditions in six months and the percent viewing the current period as a good time to expand have both tapered off since the record high Index reading in August but still remain well above their historical averages.
• Actual capital outlays are five percentage points higher than in August, although plans for outlays are eight points below the high for this expansion.
• Plans to invest in inventories are only two points below August, the record high. Satisfaction with inventories is two points better.

This month’s NFIB Jobs Report noted job creation remained solid with a net addition of 0.25 workers per firm, up from 0.19 in November and the best reading since July. A seasonally-adjusted net 23 percent plan to create new jobs, up one point from November’s reading.  Not seasonally adjusted, 23 percent plan to increase total employment at their firm (up one point), and 5 percent plan reductions (down two points).

A record 39 percent of small business owners reported job openings they could not fill in the current period. Sixty percent of owners reported hiring or trying to hire, but 90 percent of those reported few or no qualified applicants for the position. Twenty-three percent of owners cited the difficulty in finding qualified workers as their Single Most Important Business Problem.

“Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates,” said NFIB Chief Economist Bill Dunkelberg. “However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

The percent of business owners reporting that they increased employee compensation continued at 45-year record high levels. In December, a net 35 percent reported increasing compensation and a net 24 percent reported planned increases in the next few months.

The net percent of owners reporting inventory increases fell three points to a net three percent (seasonally adjusted), following November’s strong showing, the second-best since 2005.

A net 4 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down five points from very strong readings. The net percent reporting higher sales averaged two percent in 2017 but 9 percent in 2018, with a peak value of 15 percent. The net percent of owners expecting higher real sales volumes fell one point to a net 23 percent of owners. Consumer spending has remained steady and small manufacturing and construction firms cannot find enough employees to fill their open positions, selling all they can produce without more workers.

Unchanged from last month, 61 percent of owners reported capital outlays. Of those making expenditures, 42 percent reported buying new equipment, 25 percent acquired vehicles, and 15 percent improved or expanded facilities. Six percent acquired new buildings or land for expansion and 15 percent spend money for new fixtures and furniture.

Thirty-two percent of owners reported all credit needs met (unchanged), and 50 percent said they were not interested in a loan, up three points. By comparison, only three percent reported financing was their top business problem (up one point), while 13 percent cited taxes (down six points), 14 percent citing regulations and red tape, and 23 percent the availability of qualified labor.