Small-Business Confidence Remains Very High, But Labor Concerns Continue

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by: American Institute of Economic Research

By Robert Hughes

The small-business-optimism index from the National Federation of Independent Business fell slightly in June, coming in at 107.2 versus 107.8 in May. However, the June result was the sixth-highest in history and extends a run of 19 consecutive months above 100, a very high level by historical comparison.

While many of the individual indicators that make up the overall optimism index ticked down in the latest month, nearly all remain at very high levels. A significant concern among small businesses is the declining quality of the available labor force (see chart), particularly in the context of an already-tight labor market and robust plans for increased hiring in the near future.

The general outlook remained positive as the percentage of respondents believing now was a good time to expand came in at 29, down from a cycle high of 34 in May but well above the single-digit percentages seen for most of 2016. The net percentage of respondents expecting better economic conditions ("better" minus "worse") came in at 33, down from 37 in May but quite high compared to negative numbers from 2016. A net 26 percent expect higher sales over the coming months while a net 10 percent reported higher sales for the most recent three months versus the prior three months.

The percentage of firms planning to increase employment rose to 20 percent from 18 percent in May. The 20 percent result is one of the highest on record. 36 percent of firms report having openings they are not able to fill at the moment. At the same time, the percentage of firms reporting few or no qualified applicants for job openings was a record high 55 percent in June, up from 48 percent in May. That combination in the labor market of healthy demand and weak supply has 21 percent of firms saying they intend to increase worker pay over the coming months.

The labor-market dynamics have made quality of labor the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor ranks first at 21 percent, taxes came in second at 16 percent, and government regulation and red tape was third on the list at 14 percent (see chart). At the bottom of the list were inflation, and financing and interest rates, with just 2 percent saying these were significant issues.

Inflation has been at the bottom of the list for several years, reflecting the slow pace of price increase over the current cycle. Cost of labor was third-lowest but has been drifting up in recent years, reflecting the tightening labor market (see chart).

The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows a slight dip in job openings in May from a record-high level in April, providing more support to a positive outlook for the labor market. Total job openings in the United States fell to 6.638 million in May from 6.84 million in April. Private sector jobs openings totaled 6.035 million in the latest month, down from 6.263 million previously. The industries with the largest number of openings were professional and business services (1.190 million), healthcare (1.119 million), accommodations and food service (817,000), and retail (776,000).

The jobs openings rate, openings divided by the sum of jobs and openings, ticked down to 4.3 percent from 4.4 percent for the total labor market, and decreased to 4.6 percent from 4.7 percent for the private sector. The highest openings rates were in accommodation and food service (5.5 percent), professional and business services (5.4 percent), and healthcare (5.3 percent).

Further signs of labor market strength may be seen in the layoffs rate, which dropped to 1.2 percent for private employers, well below the 2.2 percent peak rate in 2009, and the quits rate, which ticked up to a cycle-high 2.7 percent. The low layoffs rate is confirmed by the multi-decade low level of initial claims for unemployment insurance while the high quits rate corroborates the high level of confidence in the jobs market seen in The Conference Board Survey of Consumers.

Overall, the data relating to the labor market continue to show strength. Payrolls are rising, layoffs remain low, and quits have risen. The substantial number of open positions in the economy and low unemployment rate suggest wage gains may accelerate, but, as of now, increases have remained quite moderate. Still, attracting and retaining qualified labor is likely to remain a critical issue for business in the immediate future.

These reports are consistent with other economic data that suggest a positive outlook for the economy in the months and quarters ahead. However, tightness in the labor market, while a win for workers, is putting pressure on labor costs and profits for small businesses.