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SME Optimism At Historic Highs – But Something’s Missing

Summer is in full swing for much of the U.S., and that can be a promising time for small business owners. The latest report from the National Federation of Independent Businesses, relayed via its Index of Small Business Optimism, offers a snapshot of the nation’s SMEs in May, just ahead of what may prove to be a busy season for some business owners.

According to the NFIB’s latest index, optimism remains at peak levels. Data for May shows continued optimism carrying over from April’s index reading of 104.5. PYMNTS takes a look at the most recent NFIB index, packed with data about how small business owners enter the summer season. A deeper look into the data show there’s more to the optimism trend than meets the eye – and it’s not all good news.

15% of small business owners reported hiring three workers each, with hiring activity for May near its highest levels in the index’s 43-year history, the NFIB said. Just 9% of business owners said they cut 2.3 workers per company.

59% of small business owners hired – or at least tried to – in May, but 51% said they couldn’t find enough qualified workers to fill the positions. A vast majority (86%) of the owners who said they tried to hire more staff in May cited this issue of an insufficient talent pool,  and 19% of all small business owners said finding enough qualified workers was their top concern – the second-largest problem for SMEs.

39% of small businesses expect the economy to improve, up 1% from April levels, and sales expectations also increased month to month.

28% said they plan to make capital outlays, which is up from April but still “well below historical levels for periods of growth,” the NFIB said in its announcement of the report.

2% fewer SMEs said they plan to increase inventories, compared with April’s reading, and the percentage of SMEs that said now was a good time to expand (23%) also declined by 1% month to month.

6 months in a row, the Index of Small Business Optimism has hit historically high levels, remaining at 104.5 for the month of May, the same reading seen in April.

Overall, the NFIB remarked that the index reflected surging optimism among the nation’s SMEs, and according to NFIB President and CEO Juanita Duggan, that optimism “shows no signs of slowing down.

“Small business owners are highly encouraged by the president’s regulatory reform agenda, and they remain optimistic there will be tax reform and healthcare reform,”the CEO added. “This is a policy-driven phenomenon.”

But NFIB Chief Economist Bill Dunkelberg said the market should watch the small business employment environment.

“The tight labor market has been a persistent problem for small business owners for the past several months, and the problem appears to be getting worse,” he stated. “It’s forcing small business owners to increase compensation, which we’re seeing in this data, to attract new workers and keep the ones they have. But it also means a lot of small business owners are short-handed. They can’t keep up with customer demand because the labor pool isn’t producing enough qualified workers.

“It’s a significant structural problem in the economy that policymakers will have to watch,” Dunkelberg added.

Analysts should also watch the depressed levels of capital outlay plans, he said.

“Typically, in a strong economy, we see a lot more spending on capital,”  Dunkelberg said. “We’re seeing increased hiring activity and some other positive signs, but the capital-outlays component is the missing ingredient for robust economic growth.”

Duggan pointed to tax reform as a key component of pushing SME optimism up over the edge and promoting small business investment.

“If Congress wants small businesses to invest in the economy, then they must cut taxes and simplify the code,”she stated. “The president’s tax plan would slash taxes for small businesses and level the playing field for businesses of every size and structure. Congress also has other good ideas for tax reform, but they need to stop talking and pass a bill.

“We know, based on our data, that small business owners are watching very closely what is happening in Washington,” she continued. “The optimism is based on the expectation of policy changes, and that means tax reform.”

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