December Small Business Optimism and November JOLTS report

KEY DATA: NFIB Index: -2.6 points/ Job Openings: -46,000; Hires: -104,000; Quits: -13,000

IN A NUTSHELL: “Despite a modest decline in optimism, small business owners remain exuberant and that should lead to greater job growth, if they can find the workers.”

WHAT IT MEANS: Small is good, at least when it comes to job creation, so near record levels of small businesses optimism is something to celebrate. Yes, the National Federation of Independent Businesses Small Business Optimism index did recede in December, but it remained near record highs. That was reached right after the Reagan tax cuts were passed, so you can probably say that small business owners are big on tax cuts. They would like to hire more workers, but they continue to be constrained by the lack of qualified workers, especially in construction and manufacturing. What is interesting in the report was the difference between actual conditions and optimism. Earnings growth is slowing, sales are moderating and costs, especially wages and compensation, are rising. Yet there is optimism about future sales. Owners are making plans to hire more workers, yet 54% of the respondents said they could find few or no qualified applicants. As for capital spending, there has yet to be a surge in plans to invest.

The lack of workers that small businesses are finding is a universal issue. While the number of job openings eased in November, it remained extremely high. It is likely the slowdown in hiring is due to the lack of labor turnover. Despite what appears to be an employee market, workers are just not quitting their jobs and making themselves available to the highest bidder. On top of that, the rate of layoffs and discharges is almost at an historic low. There is just no churn in the market and that is restricting the ability of companies to find “qualified” workers.

MARKETS AND FED POLICY IMPLICATIONS: Over the next few months, workers will start seeing their paychecks boosted by the tax changes. For some it will be minimal but for many it may be enough to generate stronger spending. Meanwhile, businesses will be making plans for the surge in after-tax earnings that will be staying in their bank accounts. We are seeing a variety of announced plans, ranging from workers bonuses to massive stock buybacks. What is likely coming is a flood of mergers and acquisitions. In a perverse way, that may be good for the labor market as lots of workers will lose their jobs, adding to supply. It is going to take a long time for the effects and consequences, intended or not, of the tax changes to become clear. Until then, the exuberant investor will likely remain that way. As for the Fed, it looks like it still is all about inflation or expected inflation. I suspect it will take an extended period of above target price increases to get the Fed to tighten as many as three to four times this year. But that is not out of the question. My forecast of at least three moves last year won me lunch and I am betting another lunch on four moves this year.