NFIB Small Business Survey: Slight Downturn in June

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.

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

America’s small business owners’ optimism took a modest downturn in June, according to the NFIB Small Business Optimism Index, slipping 1.7 points to 103.3. While optimism remains at historically high levels, the June figure reverses the gain posted in May, with six components falling, three improving, and one unchanged. The Uncertainty Index rose substantially, increasing seven points to the highest level since March 2017.

“Last month, small business owners curbed spending, sales expectations and profits both fell, and the outlook for expansion dampened. When you add difficulty finding qualified workers and harmful state level laws and regulations, you’re left with a volatile mix where uncertainty has increased to levels not seen in more than two years,” said NFIB President and CEO Juanita D. Duggan.

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 1.7 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

Thirty-six percent of all owners reported job openings they could not fill in the current period, down 2 points from May but still high. A seasonally-adjusted net 19 percent plan to create new jobs, down 2 points.

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 rose 7 points to a net 17 percent, seasonally adjusted. Seasonally adjusted, a net 23 percent plan price hikes (up 3 points).

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, unchanged and historically very low. Twenty-nine percent reported all credit needs met (down 5 points) and 55 percent said they were not interested in a loan, up 1 point.

NFIB Commentary

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

The Federal Reserve Bank of the United States has now taken center stage in the financial news. We are told that the market wants an interest rate cut and that we need one to inoculate the economy against a recession. We “know” this because the market has now bet zillions of dollars on lower rates which puts downward pressure on actual rates. Confirming the “who” that wants lower rates, when Fed Chairman Powell hinted at entertaining lower rates at his Chicago Listening Tour event, the S&P500 rose 500 points. Wall Street investors cheered!

If growth slows, that is not bad in a fully employed economy that can’t find enough workers to fill open job positions. The labor supply has become a constraint on growth, especially in industries like construction and transportation. The economy is at “full employment” and that can be sustained with growth rates under 3 percent.

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.