NFIB Small Business Survey: "Optimism Roars Back, Rivaling Historic Highs"

The latest issue of the NFIB Small Business Economic Trends came out this morning. The headline number for May came in at 105.0, up 1.5 from the previous month. The index is at the 95th percentile in this series. Today's number came in above the Investing.com forecast of 102.3.

Here is an excerpt from the opening summary of the news release.

Small business optimism eclipsed pre-shutdown levels, increasing 1.5 points to 105.0 in May. Six components in the Small Business Optimism Index improved, three were unchanged, and one dipped. Capital spending plans increased along with actual outlays. Small business owners’ expectations for sales, business conditions, and expansion all rose, as the previously reported inventory imbalance was resolved. Earnings, job creation, and compensation remained very strong.

“Optimism among small business owners has surged back to historically high levels, thanks to strong hiring, investment, and sales,” said NFIB President and CEO Juanita D. Duggan. “The small business half of the economy is leading the way, taking advantage of lower taxes and fewer regulations, and reinvesting in their businesses, their employees, and the economy as a whole.”

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example, the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings following the Great Recession that ended in June 2009.

 

Here is a closer look at the indicator since the turn of the century.

 

The average monthly change in this indicator is 1.5 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

 

Here are some excerpts from the report.

Labor Markets

Sixty-two percent reported hiring or trying to hire (up 5 points), but 54 percent (up 5 points) reported few or no qualified applicants for the positions they were trying to fill. Twenty-five percent of all owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, equaling the record high.

Inflation

How effective has the Fed's monetary policy been in lifting inflation to its two percent target rate?

The net percent of owners raising average selling prices fell 3 points to a net 10 percent, seasonally adjusted. Seasonally adjusted, a net 20 percent plan price hikes (down 1 point).

Credit Markets

Has the Fed's zero interest rate policy and quantitative easing had a positive impact on Small Businesses?

Three percent of owners reported that all their borrowing needs were not satisfied, down 1 point and historically very low. Thirty-four percent reported all credit needs met (up 2 points) and 54 percent said they were not interested in a loan, up 3 points.

NFIB Commentary

This month's "Commentary" section includes the following observations and opinions:

The first quarter GDP revision put the growth rate at 3.1 percent, only 0.1 percent lower than first thought. April is not looking quite as strong, with investment spending at large firms and manufacturing looking a bit weaker. But one month does not a quarter make. The financial press is replete with concerns about a growing “weakness,” both here and abroad, but there is no sign of concern on Main Street as the Optimism Index ventured into rarely reached territory. The surge in optimism was supported by solid gains in reported capital spending, hiring, inventory investment, and profit trends.

Productivity increased at a 3.6 percent annual rate in the first quarter, the best reading in a decade. The pickup in productivity growth coincides with a ramp up in investment spending on Main Street, which lagged for the decade prior to 2017. Half of private employment is in the small business sector, so productivity improvement there is important for income growth for U.S. workers. It is important to keep policy focus on the small business half of the economy to ensure that it is not dissuaded from investing and hiring because of “policy oversight” like not making the tax cuts permanent.

Business Optimism and Consumer Confidence

The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so it is plotted on a separate axis to give a better comparison of the two series from the common baseline of 100.

 

These two measures of mood have been highly correlated since the early days of the Great Recession. The two diverged after their previous interim peaks, but have recently resumed their correlation. A decline in Small Business Sentiment was a long leading indicator for the last two recessions.