Small Business Are Extremely Optimistic

Small Businesses Ramping

Small businesses continue to do spectacularly well reinforcing the strength in the labor market and the overall economy. I wouldn’t necessarily claim this index is a leading indicator, but those who claimed strong small business confidence was a signal the economy was near the end of the cycle have been wrong since December 2016. The reason they have been wrong is because looking at the chart where you already know the future, it’s easy to see there is strength before the weakness a recession brings. However, there’s nothing about optimism from small business that catalyzes such weakness.

Strength can last for a few years especially since the people coming off the employment sidelines are lengthening the labor market cycle. Other positives are that the Fed still has low rates, regulations are being eliminated, and taxes have been lowered. There’s nothing about the economy being good that means it needs to crater as inflation is still benign. The CPI report comes out on Thursday, giving us an update on how worried we should be about inflation. It’s important to realize that the housing crash catalyzed the recession in 2008. It didn’t need to happen just because small business optimism was high. The housing market created phony optimism, which means it’s up to investors to determine how solid the underlying economy is. It’s up to you to determine if this optimism is based on sustainable trends. 1.5 years of heightened optimism is already longer than the bears in late 2016 thought would occur.

The June small business report was a continuation of the 19-month trend of extreme optimism which shows no sign of stopping. The headline reading was 107.2 which fell 0.6 from last month and was 0.9 above estimates. This reading was the 6th highest in the history of the NFIB survey which has existed for 45 years. There are 540 months in 45 years which means this survey is in the 99th percentile. The May survey was the 2ndstrongest in the history of the survey.

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