Small Business Economy Today
Things Are Looking Good
Many things have been put inplace that are very helpful for the small business owner. It’s looking like it is full speed ahead for the forseeable future.
It is an excellent time and enviornment to start that business you’ve always wanted.
Manufacturing hiring has been surprisingly strong, with over 350,000 new jobs added since January 2017 compared to a loss of 190,000 manufacturing jobs over the prior eight years, according to the Bureau of Labor Statistics. Construction employment has also surged, and 57 percent of construction firms report job openings they can’t fill. This is slowing the production of new homes and contributing to the strong increase in the prices of existing homes. Overall, about 3.5 million new jobs have been added since the election, not exceptionally strong normally, but more difficult to achieve when the economy is nearing the end of a record long expansion where slowdowns are typical.
The percent of owners making capital expenditures that raise capacity and improve worker productivity (a necessity to support higher real wages) has risen from a low of 55 percent in 2016 to 66 percent this year, an “amazing” increase in spending activity. In 2016, investment for the whole economy grew less than 2 percent compared to over 6 percent in 2017 and a 9 percent annual rate so far this year.
It is hard to produce more stuff without more labor, especially in the services sector which is often dominated by small firms. With unfilled job openings at record high levels, owners are responding logically by raising worker compensation at record rates to attract needed workers. However, when new workers are in short supply, firms that succeed in filling a position often do so at the expense of another firm, creating a new open position at the firm that lost the employee to a higher bid. In the short run, the only relief from this situation occurs if more people enter the labor force, looking for a job. To a fair degree, this has happened, with 2.4 million new entrants to the labor force since January 2017 in response to the increased availability of employment opportunities and an increase in compensation being offered. Convincing non-participants to re-enter the labor force will become more difficult as the expansion continues, producing more increases in compensation to lure more non-participants to re-enter and take a job.
Over one-third of small business owners reported raising compensation in the past few months. The Federal Reserve has been counting on rising wages to push inflation to its target level of 2 percent. It appears that goal has finally been achieved and now the concern of the Fed will shift from creating inflation to managing it and raising interest rates is part of that process. The Fed will raise rates two more times this year and probably several times next year. The Fed would like to get as far away from “0” as it can so that it has room to cut rates substantially once the recession starts and it will, eventually. Higher rates will cool an economy now running “hot” and ease inflation pressures a bit.
Small business owners remain very optimistic, with 18 straight months of near record measures of owner optimism, unprecedented in NFIB’s 45 year survey history. This means that owners see much better returns on investments than in the 2008-16 period when optimism was below average every year. Pessimistic views of the future which prevailed in that period translated into poor expectations for return on business investment and consequently weak investment spending and hiring. Averaging over 105 for the past 18 months compared to 95 just before the presidential election, the NFIB Index of Small Business Optimism clearly indicates a solid year of economic activity ahead.