The NFIB Small Business Optimism Index rose 2.4 points in March to 98.2. March’s reading is the first return to the average historical reading since last November. The NFIB Uncertainty Index increased six points to 81, which was primarily driven by owners being more uncertain about whether it is a good time to expand their business and make capital expenditures in the coming months.

“Main Street is doing better as state and local restrictions are eased, but finding qualified labor is a critical issue for small businesses nationwide,” said NFIB Chief Economist Bill Dunkelberg. “Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force. However, owners remain determined to hire workers and grow their business.”

Other key findings include:
- Seven of the 10 Index components improved and three declined.
- Sales expectations over the next three months improved eight points to a net 0% of owners, a historically low level.
- Earnings trends over the past three months declined four points to a net negative 15%.

As reported in NFIB’s monthly jobs report, 42% of owners reported job openings that could not be filled, a record high reading. Owners continue to have difficulty finding qualified workers to fill jobs as they compete with increased unemployment benefits and the pandemic keeping some workers out of the labor force.

A net 28% of owners reported raising compensation (up three points) and the highest level in the past 12 months. A net 17% plan to raise compensation in the next three months, down two points.

Seven percent of owners cited labor costs as their top business problem and 24% said that labor quality was their top business problem. Finding eligible workers to fill open positions will become increasingly difficult for small business owners.

Fifty-nine percent of owners reported capital outlays in the next six months, up two points from February. Of those making expenditures, 41% reported spending on new equipment, 26% acquired vehicles, and 14% improved or expanded facilities. Six percent acquired new buildings or land for expansion and 11% spent money for new fixtures and furniture.

Twenty percent of owners plan capital outlays in the next few months, down three points from February. Owners are not planning on investing in their businesses as expected future sales and business conditions remain below average.

A net negative 6% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down eight points from February. The net percent of owners expecting higher real sales volumes improved eight points to a net negative 0%.

The net percent of owners reporting inventory increases decreased two points to a net negative 5%. A net 3% of owners view current inventory stocks as “too low” in March, down two points but remaining at historically high levels. A net 4% of owners plan inventory investment in the coming months, up two points from February.

The net percent of owners raising average selling prices increased one point to a net 26% (seasonally adjusted). Eight percent of owners reported lower average selling prices and 36% reported higher average prices. Price hikes were the most frequent in wholesale (65% higher, 5% lower) and retail (48% higher, 5% lower). A net 34% (seasonally adjusted) plan price hikes.

The frequency of reports of positive profit trends declined four points to a net negative 15% reporting quarter on quarter profit improvements. Sales have not yet improved enough for owners to report higher earnings.

Among those owners reporting lower profits, 46% blamed weaker sales, 15% cited the usual seasonal change, 10% cited a higher cost of materials, 5% cited labor costs, 5% cited lower prices, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 68% credited sales volumes, 12% cited usual seasonal change, and 7% cited higher prices.

Two percent of owners reported that all of their borrowing needs were not satisfied. Twenty-seven percent reported all credit needs were met and 59% said they were not interested in a loan. A net 1% reported that their last loan was harder to get than in previous attempts. One percent of owners reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was 0%, up two points from February.

LABOR MARKETS
Strong job growth continued for small businesses in March. Firms increased employment by 0.42 workers per firm on average over the past few months. Forty-two percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 2 points from February, a record high reading. The March reading is 20 points higher than the 48-year historical average of 22 percent. Thirtyfour percent have openings for skilled workers (up 1 point) and 19 percent have openings for unskilled labor (up 3 points). Owners are frustrated with mounting unfilled job openings as qualified and willing candidates are scarce. Fifty percent of the job openings in construction are for skilled workers, down 1 point. Fifty-five percent of construction firms reported few or no qualified applicants (down 6 points) and 38 percent cited the shortage of qualified labor as their top business problem (up 3 points). Overall, 56 percent reported hiring or trying to hire in March, unchanged from February. Owners have plans to fill open positions, with a seasonally adjusted net 22 percent planning to create new jobs in the next three months, up 4 points from February and 11 points above the 48-year historical average. Fifty-one percent (91 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in March (unchanged). Twenty-eight percent of owners reported few qualified applicants for their open positions (up 2 points) and 23 percent reported none (down 2 points).

CAPITAL SPENDING
Fifty-nine percent reported capital outlays in the last six months, up 2 points from February. Of those making expenditures, 41 percent reported spending on new equipment (up 1 point), 26 percent acquired vehicles (down 2 points), and 14 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 2 points) and 11 percent spent money for new fixtures and furniture (down 1 point). Twenty percent plan capital outlays in the next few months, down 3 points from February. Owners are not planning on investing in their businesses as expected future sales and business conditions remain below average.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 28 percent reported raising compensation (up 3 points), the highest level in the past 12 months. A net 17 percent plan to raise compensation in the next three months, down 2 points. Seven percent cited labor costs as their top business problem (down 2 points) and 24 percent said that labor quality was their top business problem, unchanged from February and the top overall concern. The frequency of reports of positive profit trends declined 4 points to a net negative 15 percent reporting quarter on quarter profit improvement. Sales have not yet improved enough for owners to report higher earnings. Among owners reporting lower profits, 46 percent blamed weaker sales, 15 percent cited the usual seasonal change, 10 percent cited a higher cost of materials, 5 percent cited labor costs, 5 percent cited lower prices, and 4 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 68 percent credited sales volumes, 12 percent cited usual seasonal change, and 7 percent cited higher prices.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-seven percent reported all credit needs met (down 1 point) and 59 percent said they were not interested in a loan (up 1 point). A net 1 percent reported their last loan was harder to get than in previous attempts (unchanged). One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was 0 percent, up 2 points from February. The average rate paid on short maturity loans was 5.1 percent, up 0.2 points from February. Twenty-three percent of all owners reported borrowing on a regular basis (down 3 points).

SALES AND INVENTORIES
A net negative 6 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 8 points from February. The net percent of owners expecting higher real sales volumes improved 8 points to a net negative 0 percent, a nice improvement but leaving expectations historically very weak. Expected sales is a major driver of decisions to invest in new capital, new inventory, and new employees. The net percent of owners reporting inventory increases decreased 2 points to a net negative 5 percent. This is likely a result of sales exceeding the firm’s ability to acquire new inventory to replace what is sold. A net 3 percent of owners view current inventory stocks as “too low” in March, down 2 points from February but remaining at historically high levels. A net 4 percent of owners plan inventory investment in the coming months, up 2 points from February.

INFLATION
The net percent of owners raising average selling prices increased 1 point to a net 26 percent, seasonally adjusted. Unadjusted, 8 percent (down 2 points) reported lower average selling prices and 36 percent (up 1 point) reported higher average prices. Price hikes were most frequent in wholesale (65 percent higher, 5 percent lower) and retail (48 percent higher, 5 percent lower). Seasonally adjusted, a net 34 percent plan price hikes (unchanged).

COMMENTARY
Forecasters are making upward revisions to their expected 2021 performance for the U.S. economy, and especially for the first half. Some observers (for example, Ambassador John Kerry) say that the “Great Reset” is taking place, and this is an “exciting time.” The government has sent trillions of dollars to consumers. If they spend it (buying goods and services), GDP (the output of goods and services) will surge. Likely, any surge in spending will come earlier in the year and fade at the end as the government spigot is turned off. Small businesses are clearly hiring, viz. almost a million new jobs, most in the private sector, and would hire more if more qualified applicants showed up. Still, total employment is about 7 million lower than in 2020 February.

The Federal Reserve remains committed to keeping interest rates low. Small business borrowers are reporting the lowest loan rates in 48 years. This is the fuel that puts stock market values at record levels (as well as house prices). Inflation remains calm, mostly because there is excess capacity for producing anything world-wide (except housing where inflation is due to a shortage of new homes and oil, as supply constraints such as production are restricted). It is insidious. Once it gets a grip on economic decision making, it is hard to curb its advance.

Main Street is doing better and will benefit from the huge stimulus. Their ability to take advantage will still depend on government antiCovid regulations. Opening up the economy could be the largest “stimulus” government could provide. There are major dislocations (in education for example) that will shape the local economies impacted by very different policies and it will take time for bad policy decisions to be exposed and remedied by the governments that created them.