The Small Business Optimism Index increased 3.5 points in May to 94.4, a strong improvement from April’s 90.9 reading. Eight of the 10 Index components improved in May and two declined. The NFIB Uncertainty Index increased seven points to 82. Reports of expected business conditions in the next six months increased 5 points to a net 34%, following a 24-point increase in April. Owners are optimistic about future business conditions and expect the recession to be short-lived.

“As states begin to reopen, small businesses continue to navigate the economic landscape rocked by COVID-19 and new government policies,” said NFIB’s Chief Economist Bill Dunkelberg. “It’s still uncertain when consumers will feel comfortable returning to small businesses and begin spending again, but owners are taking the necessary precautions to reopen safely.”

Real sales expectations in the next three months increased 18 points to a net negative 24%. Expectations about future sales are beginning to rebound after April’s lowest reading in survey history of a net negative 42%.

Fifty-two percent reported capital outlays in the last six months. Of those making expenditures, 35% reported spending on new equipment (down one point), 20% acquired vehicles (down one point), and 15% improved or expanded facilities (up two points). Five percent acquired new buildings or land for expansion and 10% spent money for new fixtures and furniture.

Twenty percent of owners are planning capital outlays in the next few months. Any extensive damage from recent protests will produce significant expenditures that were unexpected for some small business owners.

A net negative 19% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down eight points from April. Retail sales have declined significantly in the past three months. Consumer income was up significantly due to government programs assistance, but consumers, for the most part, could not get out to spend it unless they spent it online. The change in spending behavior produced a record-high savings rate of 33%. As the economy opens, this money will be spent.

Other key findings from the survey include:
- Earnings trends declined six points to a net negative 26%. Among owners reporting weaker profits, 46% blamed weak sales, 12% blamed usual seasonal changes, 9% cited price changes, 4% cited labor costs, and 4% cited material costs.
- Five percent of owners reported thinking it’s a good time to expand, up two points from April.
- The net negative percent of owners expecting higher real sales volumes improved 18 points to a net negative 24% of owners.
- A net 14% (seasonally adjusted) reported raising compensation (down 2 points) and a net 10% plan to do so in the coming months (up 3 points).

As reported in last week’s monthly jobs report, the small business labor market weakened further in the February-April period, with May survey respondents reporting reducing employment by 0.17 workers per firm in the prior three months. Most of the workers that were displaced (about 80%) expect to be rehired according to the Bureau of Labor Statistics. However, generous unemployment benefits are making it harder for some firms to re-call workers and fill open positions.

A seasonally adjusted net eight percent plan to create new jobs in May. The creation is driven in part by the forgiveness portion requirements of the Paycheck Protection Program and owners planning to re-hire workers as the economy is reopened.

LABOR MARKETS
The small business labor market weakened further in the FebruaryApril period. May Survey respondents reduced employment by 0.17 workers per firm in the prior three months, down from an addition of 0.09 workers per firm in the April report. Six percent (down 1 point) reported increasing employment an average of 3.3 workers per firm and 21 percent (up 2 points) reported reducing employment an average of 5.1 workers per firm (seasonally adjusted). May’s survey was bad news for job creation. A seasonally-adjusted net 8 percent plan to create new jobs, up 7 points. Driven in part by the forgiveness eligibility requirements for PPP and small business owners planning to re-hire workers as the economy is reopened and stay-at-home orders end. Twenty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 1 point. Just a few months ago, nearly 40 percent reported openings. Forty-four percent reported hiring or trying to hire in May, down 3 points. Thirtyseven percent (84 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill, down 4 points. Twenty percent have openings for skilled workers (down 1 point) and 10 percent have openings for unskilled labor (up 2 points). Nineteen percent of owners reported few qualified applicants for their open positions (down 3 points) and 18 percent.

CAPITAL SPENDING
Fifty-two percent reported capital outlays in the last 6 months, down 1 point from April. Of those making expenditures, 35 percent reported spending on new equipment (down 1 point), 20 percent acquired vehicles (down 1 point), and 15 percent improved or expanded facilities (up 2 points). Five percent acquired new buildings or land for expansion (unchanged), and 10 percent spent money for new fixtures and furniture (unchanged). Twenty percent plan capital outlays in the next few months, up 2 points from April.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 14 percent reported raising compensation (down 2 points) and a net 10 percent plan to do so in the coming months, up 3 points from April. Six percent cited labor costs as their top problem down 2 points from April. The historically high level of unemployed workers has loosened the labor market for small business owners. The frequency of reports of positive profit trends fell 6 points to a net negative 26 percent reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 46 percent blamed weak sales, 12 percent blamed usual seasonal change, 9 percent cited price changes, 4 percent cited labor costs, and 4 percent cited materials costs. For owners reporting higher profits, 55 percent credited sales volumes and 19 percent credited usual seasonal change.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied, down 2 points. Thirty-three percent reported all credit needs met (up 4 points) and 52 percent said they were not interested in a loan (down 4 points). A net 2 percent reported their last loan was harder to get than in previous attempts (down 2 points). Overall, access to capital is not a serious problem likely due to the popularity of the Paycheck Protection Program that most small employers have accessed. Two 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 negative 13 percent, down 2 points. Federal Reserve policies have driven interest rates to historically low levels. Twenty-six percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans was down 1.2 points at 4.6 percent.

SALES AND INVENTORIES
A net negative 19 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 8 points from April. The net percent of owners expecting higher real sales volumes improved 18 points to a net negative 24 percent of owners. After a historic 61-point drop over in March and April, some owners are expecting higher sales with business re-openings.

The net percent of owners reporting inventory increases fell 4 points to a net negative 15 percent. The net percent of owners viewing current inventory stocks as “too low” improved to a negative 5 percent, a 2point increase from April. Sales are expected to improve but not if the firm lacks the goods to sell. The net percent of owners planning to expand inventory holdings increased from April by 6 points to a net 2 percent as sales prospects improved.

INFLATION
The net percent of owners raising average selling prices rose 4 points to a net negative 14 percent, seasonally adjusted. Unadjusted, 23 percent (down 1 points) reported lower average selling prices and 12 percent (up 3 points) reported higher average prices. Price hikes were most frequent in retail (14 percent higher, 21 percent lower) and wholesale (15 percent higher, 21 percent lower). Seasonally adjusted, a net 9 percent plan price hikes (up 12 points).

COMMENTARY
The economic landscape is in turmoil, rocked by government policies to fight Covid-19, dramatic changes in Federal Reserve policies, the behavior of financial markets, government policies to stimulate the economy, and widespread protests expressing overwhelming public concerns.

Policies to curb the spread of Covid-19 also curbed the growth in retail sales which in April alone fell 16 percent. Policies to support spending produced a major surge in personal income which collided with the anti-Covid-19 policies. Unable to easily spend the money, consumers “saved” it (including debt reduction), producing a savings rate of 33 percent, a historic record.

This “pot” of money will find its way into the economy, but the pace at which it does will depend on how quickly the economy is reopened, which depends on the decisions of at least 50 levels of government and reports about the incidence of new Covid-19 cases. Consumers will have to feel safe about emerging from lockdown in order to spend the money which, in turn, will shape the pace of the recovery in employment.

More stimulus? Likely if the recovery in employment lags. There is plenty of pent-up demand. If conditions are favorable, that will provide lots of stimulus to the private sector. The Fed will maintain its current posture, leaving interest rates historically low and liquidity strong. The stock market is “optimistic.”There are a huge number of policies and regulations that will determine how the economy does, lots of uncertainty, but likely “upward” and small businesses are eager to get back to work.