Small business optimism rose 0.8 points to 94.9, which was slightly better than market expectations and marks the highest level this year, in the October edition of the National Federation of Independent Business Small Business Optimism survey. Five of the survey’s 10 major components increased during October, three declined and two were unchanged. The largest increase came in plans to increase inventories, which jumped 9 points. The increase provides additional confirmation that the long drag on economic growth from inventory destocking may be ending. Inventory growth added 0.6 points to third quarter real GDP growth, marking the first quarterly increase since the second quarter of 2015.
While plans to increase inventories rose sharply, the level of current inventories at small businesses was less impacted. The current inventory index rose 3 points in October to -4 percent, meaning that more businesses felt they had too much inventory than felt they had too little. The series remains close to its average for the past year. More firms also noted that they reduced inventories in October than said they increased them.
The improvement in inventory sentiment is notable. Retailers account for 25 percent of the survey and the improvement in perceived inventory levels is an encouraging sign as holiday shopping season draws near.
While small business optimism rose to its highest level of the year, confidence about the economy and business conditions in general remains relatively low by historic standards. Business owners still have a long list of concerns and far more business owners believe that now is not a good time to expand their business due to economic conditions, 25 percent, and the political climate, 22 percent. As we have noted in previous reports, small business owners tend to pay more attention to political issues and vote in much greater proportion than the population as a whole.
Small business optimism tumbled 5.8 points in the aftermath of the 2012 election. Taxes, government regulations and red tape, and the quality of labor remain the top issues for small business owners.
The first two are little changed over the past year, while the last has become increasingly important in recent years. Along those lines, 28 percent stated they had job openings they could not fill, up 4 points from September. In all, 55 percent of small business owners were either hiring or trying to hire workers, which was down 3 points from September. Of those firms trying to hire workers, 48 percent stated that they had few or no qualified applicants for the jobs they were trying to fill. The inability of small business owners to find the workers they need has steadily pushed compensation costs higher. Twenty-five percent of business owners reported raising worker compensation in October, up 3 points from the prior month.