Small Business Sentiment Hits A Level Last Seen In October 2007
The latest issue of the NFIB Small Business Economic Trends is out today. The May update for April came in at 95.2, up 1.8 points from the previous month's 93.4. Today's headline number is at the 26.1 percentile in this series and the highest level since October 2007, two months before the Great Recession.
The Investing.com forecast was for 94.6.
Here is the opening summary of the news release.
"April's Index did pass the 95 mark that seemed to block any progress in optimism for the past five years. However, the Index is still 5 points below the average reading from 1973 to 2008, and far from what is considered expansion levels. This reading can only be characterized as a high end recession reading," said NFIB chief economist Bill Dunkelberg. "Small business confidence rising is always a good thing, but it's tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis. From the small business perspective there continues to be no progress on their top problems: cost of health insurance, uncertainty about economic conditions, energy costs, uncertainty about government actions, unreasonable regulation and red tape, and the tax code. So while the improvement is welcome, as long as small business owners continue to have negative views owners about the future, the 95 number may fade." (Link to news release).
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 of the past four years. The NBER declared June 2009 as the official end of the last recession.
The average monthly change in this indicator is 1.29 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.
Inventories And Sales
The findings on small business inventories and sales shows improvement but inventory restocking is absent. The excerpts below are from the latest monthly report (PDF format).
| he pace of inventory reduction was steady, with a net negative 6 percent of all owners reporting growth in inventories (seasonally adjusted). Reductions are good if in response to strong sales, but not so good if it is in response to weak sales. Owners are satisfying orders with existing inventory but not ordering new stocks. |
Credit Markets
Has the Fed's zero interest rate policy and quantitative easing had a positive impact on Small Businesses?
| Five percent of the owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 53 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem (the record low). |
NFIB Commentary
This month's "Commentary" section opens with the following observations:
| With the unemployment rate falling to 6.3 percent and headed lower, the Federal Reserve will soon be able to declare victory, leaving economists to debate for years whether QE2 and QE3 really helped or hindered the recovery. The U.S still has $3 trillion in excess reserves sitting at the Federal Reserve, potentially available to support an expansion in loans. The Federal Reserve portfolio has over $4 trillion earning interest that currently accounts for about 10 percent of record-high after-tax corporate profits. Yes, the Federal Reserve is a private firm. This is just one of the major distortions created by the Federal Reserve, and it’s not the worst. Since 2009, consumers have lost trillions of dollars in interest income, a damper on consumer spending. Interest expense per share for the larger firms have fallen by more than 50 percent helping earnings per share to hit record high levels, all based on "unreal" interest rates. |
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 I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.
These two measures of mood have been highly correlated since the early days of the Great Recession.
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