This morning's release of the NFIB's Small Business Optimism Index for the month of December was expected to fall down to 101.4 versus a reading of 101.7 in November.  However, the politically sensitive report has continued to surge following the election. The index rose all the way up to 105.1 to set the highest reading since October 2018.  As shown below, small businesses have gone from being extreme pessimists six months ago to extreme optimists today.

Small business optimism has now surged 11.4 points since the October report, which is a record two-month increase in the history of the survey going back to 1986.  As shown below, the only 2-month increases that even come close were a comparable 10.9 point increase in the wake of the 2016 election, a 9.7 point rebound in June 2020 after the worst of COVID lockdowns, and an 8.9 point jump in March 1991.

In the table below, we provide a breakdown of the levels of each category of the report in December as well as the month-over-month change and how those all rank as percentiles of their respective historical range.  Obviously given the surge in the headline number, there were multiple categories that saw top decile month-over-month jumps in December.

As shown in the table above, the single largest jump of any category was for expectations for the economy to improve (the outlook for general business conditions). That index rose 16 points to reach the second highest level on record. The current reading is only one point below the record of 53 set in March 2002.

As the outlook for the economy improved dramatically, small businesses are increasingly thinking it's now a good time to expand.  As shown below, 20% of firms reported that they view the next three months as a good time to expand. That is the highest share of the post-COVID era.

The NFIB provides a breakdown of the reasons small businesses have for their current expansion outlooks.  For those with a negative outlook, 19% report that it is due to economic conditions with an identical percentage for those reporting an uncertain outlook. In both cases, those were the most common reasons given.  Alternatively, for those that gave a positive expansion outlook, only 4% reported it was due to the economy whereas an overwhelming 10% indicated it was due to the political climate. In other words, small businesses see now as a good time largely due to changes in the political, rather than economic, landscape.

As we have frequently noted in the past, one downside to the NFIB survey is the presence of extremely strong political biases, especially in the past few election cycles. Historically, the index and its components have been stronger during Republican administrations and weaker during Democrat administrations, hence the recent surge following President Trump's win this past November.  With that said, certain categories of the report (which we highlighted in today's Morning Lineup) have tended to be less politically sensitive.

In the charts below we standardize and average across the individual categories of the report those that measure "actual" changes to the businesses (i.e. - actual earnings changes, actual sales changes, actual employment changes, etc.) versus those that survey on "expectations" or "plans" (i.e. - hiring plans, expect economy to improve, etc.).  As shown, while both indices for expectations and actuals have risen significantly in the past couple of months, it's the former that has seen the more pronounced move.  As a result, the spread between expectations and actuals hit a record high in December. That means in the history of the survey, there has never been a time in which small businesses reported stronger optimism and expectations relative to what they have actually reported is going on within their businesses.

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