NFIB Small Business Survey: "Small Business Optimism Dips In December"

The latest issue of the NFIB Small Business Economic Trends came out this morning. The headline number for December came in at 102.7, down 2.0 from the previous month. The index is at the 85th percentile in this series.

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

Small business optimism ended the year historically strong, with a reading of 102.7, down 2 points from November. Seven of 10 components fell, two improved, and one was unchanged. An increased number of small business owners reported better business conditions and expect higher nominal sales in the next three months. While frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey’s 46-year history. Small businesses continued to hire and create new jobs with actual job creation matching November’s reading, the highest since May.

“December marked the end of another banner year for the small business economy, as owners took full advantage of strong consumer spending, and federal tax and regulatory relief,” said NFIB Chief Economist William Dunkelberg. “2020 is starting out with a solid foundation for continued growth, two-years into the Tax Cuts and Jobs Act that’s providing fuel to grow small businesses and their workforce.”

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.

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

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The average monthly change in this indicator is 1.3 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.

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Here are some excerpts from the report.

Labor Markets

Net job creation had faded from February’s 0.52 workers per firm to September’s 0.10, but is back in strong territory. Finding qualified workers remains the top issue for 23 percent reporting this as their number one problem, 4 points below August’s 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 rose 2 points to a net 14 percent, seasonally adjusted, continuing a measured upward trend since September. Unadjusted, 10 percent (up 2 points) reported lower average selling prices and 20 percent (up 3 points) reported higher average prices. Seasonally adjusted, a net 20 percent plan price hikes (down 2 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 near a record low. Twenty-nine percent reported all credit needs met (up 1 point) and 56 percent said they were not interested in a loan. Three percent reported their last loan was harder to get than in previous attempts, unchanged and also near a record low.

NFIB Commentary

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

December marked the end of another strong year for the small business economy, adding to a historic run of elevated optimism among owners. 2020 is starting out with a solid foundation for continued growth. News coverage of a possible recession is muted and the Federal Reserve finally suspended its run of rate cuts.

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.

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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.