The Small Business Optimism Index jumped 2 points to 106.9 in January and set a record with the number of small business owners saying, “Now Is a Good Time to Expand,” according to the National Federation of Independent Business's (NFIB) Small Business Economic Trends Survey.

“Main Street is roaring,” said NFIB President and CEO Juanita Duggan. “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.”

“Now Is a Good Time to Expand” registered at 32%, the highest level in the history of the NFIB survey, which began in 1973. Actual Earnings climbed up 11 points from December, the highest level reported since 1988. Plans to make capital outlays jumped up two points, and plans to increase inventories gained four points.

“The historically high index readings over the last year tell us small business owners have never been more positive about the economy,” said NFIB Chief Economist Bill Dunkelberg. “This is in large response to the new management in Washington tackling the biggest concerns of small business owners — high taxes and regulations.”

As small business owners struggle to find qualified workers for open positions, reports of higher worker compensation rose 4 percentage points to a net 31%, the highest reading since 2000 and among the highest in the 45 years of NFIB’s survey. Plans to raise compensation also rose 1 point to a net 24%, the highest reading since 1989.

“Finding qualified workers now exceeds taxes and regulations as the top concern for small businesses,” said Duggan.

Labor Markets

Job creation was solid in the small-business sector as owners reported a seasonally adjusted average employment change per firm of 0.23 workers, a strong showing. The lack of “qualified” workers is impeding growth in employment. Thirteen percent (unchanged) reported increasing employment an average of 2.4 workers per firm and 9% (down one point) reported reducing employment an average of 3.4 workers per firm (seasonally adjusted). Fifty-five percent reported hiring or trying to hire (down 4 points), but 49% (89% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 3 points), exceeding the percentage citing taxes or the cost of regulation as their top business problem. Thirty-four percent of all owners reported job openings they could not fill in the current period, up three points from December. Twelve percent reported using temporary workers, unchanged. A seasonally adjusted net 20% plan to create new jobs, unchanged from December and at record high levels. Labor markets have become very tight, for both skilled and unskilled workers.

Sales and Inventories

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was a net 5%, a four point decline following a 14 point improvement in December. The net percent of owners expecting higher real sales volumes fell three points, falling to a net 25% of owners, still one of the best readings since 2007.

The net percent of owners reporting inventory increases rose 6 percentage points to a net 4% (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” was a net negative 5%, 3 points lower than December. Apparently the buildup of inventories left stocks a bit larger than owners wanted, based on expected sales volumes. However, the net percent of owners planning to add to inventory rose 4 points from December to a net 3%. Plans averaged 4% in the last six months of 2017 as firms geared up for a solid holiday season.

Capital Spending

Sixty-one percent reported capital outlays, unchanged from December and the second highest reading in this recovery to date. This anticipates a substantial increase in capital spending. Of those making expenditures, 44% reported spending on new equipment (up 1 point), 28% acquired vehicles (up 5 points), and 16% improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion (unchanged) and 13% spent money for new fixtures and furniture (down 2 points). Twenty-nine percent plan capital outlays in the next few months, up 2 points from December. Improvements in productivity depend crucially on investment spending in the labor intensive small-business sector. Improved earnings trends and lower taxes increase the pool of capital available for firms to invest in their businesses. Many of these investments do not involve “high” or new technology, just improvements in standard equipment and processes.

Compensation and Earnings

Reports of higher worker compensation rose four percentage points to a net 31%, the highest reading since 2000 and among the highest in survey history. Twenty-two percent (up 3 points) selected “finding qualified labor” as their top business problem, the highest reading since 2000, the peak of the last expansion. Plans to raise compensation rose 1 point in frequency to a net 24% in response to tighter labor markets, the highest reading since 1989. Small firms are raising compensation to attract and keep the employees they need. The frequency of reports of positive profit trends improved a huge 11 points to a net negative 4% reporting quarter on quarter profit improvements, the best reading since March of 1988.

Inflation

The net percent of owners raising average selling prices rose 3 points to a net 11% seasonally adjusted, the highest reading since July 2014. Unadjusted, 9% of owners reported reducing their average selling prices in the past three months (down 2 points), and 19% reported price increases (up 4 points). Seasonally adjusted, a net 23% plan price hikes (up one point), although far fewer will report actually doing so in the following months. There is a strong dynamic in price adjustments on Main Street that is typical of a less regulated market.

Credit Markets

Three percent of owners reported that all their borrowing needs were not satisfied, unchanged and historically low. Thirty-one percent reported all credit needs met (down 1 point) and 52% said they were not interested in a loan, unchanged. Only 2% reported that financing was their top business problem. Three percent reported loans “harder to get,’ unchanged and at historic lows. Thirty-one percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans was down 20 basis points at 5.9%. If the Federal Reserve raises rates the anticipated three times this year, variable rate loan costs will respond immediately, although longer term rates are not likely to reflect the full hike.

The new tax law, the Tax Cuts and Jobs Act, produced the most recent boost to small business optimism. And federal government related cost pressures continue to abate, offering a more supportive business climate for small firms. Consumer spending remains supportive, and business spending and housing remain strong.

On the Federal Reserve front, the minutes of their last meeting revealed a discussion of inflation that mirrored much of the recent public discussion by Former Chair Yellen, who acknowledged the difficulties the committee has in understanding current inflation dynamics and why inflation continues to remain below target, despite very accommodative policies. It is worrisome that our central bank wants to create inflation and assumes that once it has “enough,” it can keep inflation from going higher. The Federal Reserve’s forecast is that inflation will continue to rise and then stop at their target of 2%, they offer no explanation of why or how it will stop. And, there is no rigorous explanation of why 2% is the “right” level for the economy. If it is not, pursing policies that try to increase inflation could become even more damaging to the economy, hurting the small business sector. In the meantime, the Federal Reserve will continue to raise rates.

The U.S. ranked second in the World Economic Forum (Davos)’s assessment of global competitiveness. Strong points included inflation, venture capital, business sophistication, innovation, financial market development, labor market efficiency, and higher education and training. Not so good U.S. ranking included 61st (out of 137 economies studied) on business costs of crime and violence, 57th on organized crime, 39th for internet use penetration and 95th on tax rate as a percent of profits (pre tax law). The extensive size and performance of our small business sector plays a key role in supporting these rankings and now government policies are more focused on strengthening the competitiveness and performance of this sector by reducing regulatory and tax restrictions that waste time and capital. The new tax law is one more significant step towards establishing a pro-growth environment supporting the small business sector.