Are Markets Wrong Again About The Fed?

The NFIB small business confidence index had its 3rd largest crash on a record in December, but we aren’t worried. The decline was political. Small business confidence is higher when a Republican is in office. That’s why confidence was high in 2020 despite conditions for small businesses being the worst ever according to some metrics. You can see in the chart below, the NFIB index was higher before the election than it was in the early 2010s even though the situation was much worse in 2020 especially for independent restaurants. We like to look at this report in rate of change terms, adjusting for politics. We also look at the details, so we can get rid of the expectations on the economy.

We throw out the index that measures ‘expectations for the economy to improve’ for months like this. We’d rather hear how sales did and extrapolate how the economy is doing based on that. Small businesses can tell us how business is going, but their opinion on the economy can easily be manipulated. In December, the net expecting the economy to improve fell 24 points to -16%.

With that being said, it’s not like December was a good month for small firms. There just wasn’t as much of a drop-off as this index suggests. Every category declined except current inventories (bad of they rise). The ‘plans to increase employment’ and ‘plans to make capital outlays’ indexes fell 4 points to a net 17% and 22%. Therefore, a huge swath of small firms didn’t change their hiring or investment plans, yet got more negative on the economy because Biden won.

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