Wells Fargo Reports: Small Business Confidence Remains Strong in January

After surging 7.5 points in December, the NFIB’s Small Business Optimism index rose another 0.1 percentage point in January. Five of the indices 10 series rose during the month and five fell, all by a small amount.

Small Business Owners Remain Optimistic

The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 0.1 percentage point in January to 105.9. Small business confidence has risen 11.6 percent over the past three months and is currently at its highest level since December 2004. The improvement has been driven by the resurgence in the proportion of business owners that feel the next three months will be a good time to expand, which has more than doubled since October to an expansion high of net 25 percent.

Small business owners are much more optimistic about future conditions than they are about the current business environment. The percentage of firms reporting higher sales over the past three months rose 5 points in January but remain at a historically low level at -2. That means that slightly more business owners reported sales were lower over the past three months than during the preceding three months. By contrast, expectations for sales have improved dramatically, although they did dip slightly in January. Expectations for sales over the next three months fell 2 points in January to 29, after surging 20 points in December and rising 10 points in November.

Sluggish sales growth has been a persistent challenge for business owners throughout this expansion. Real GDP growth has averaged just a 2.1 percent pace since the Great Recession ended more than seven and a half years ago. With little pricing pressure, overall revenue growth in the economy has struggled to reach 4 percent each year, which has simply been too slow to cover the rising operating and regulatory costs.

Compensation costs continue to accelerate. The net proportion of firms reporting that compensation cost increased during the past three months rose 4 points in January to 30 percent and is now at its highest level of this expansion. The increase comes at a time that many states and localities have raised the minimum wage and also coincides with reports of unusually large hikes in healthcare premiums. By contrast, the net proportion of firms planning to boost compensation costs fell 2 points in January to 18 percent. The contrast between expectations for sales and actual sales and expectations for compensation costs and actual compensation costs is striking. Sales are not growing as fast as business owners expect while compensation cost have consistently outpaced expectations.

Despite the squeeze on operating margins, more business owners report they plan to boost hiring in the next three months. Hiring plans rose 2 points in January to 18 and are up a cumulative 8 points since October. While more businesses plan to add staff, a rising proportion of firms also report they are having difficulty filling open positions. Attracting skilled workers has persistently ranked as one of the most pressing issues problems facing small business owners, following taxes and regulation.