Small Business Sentiment: "Optimism Ticks Up Slightly"

August 12, 2014

by Doug Short

The latest issue of the NFIB Small Business Economic Trends is out today. The August update for July came in at 95.7, a 0.7 point uptick from the previous month's 95.0. This is the first improvement in the headline number after three months of slippage. The index is now at the 31.9 percentile in this series, a level it last achieved in October 2007, two months before the last recession.

The forecast was for 96.3.

Here is the opening summary of the news release, which takes a typically cautious view of the survey findings.

July’s Optimism Index technically rose 0.7 points to a reading of 95.7. There was little change in the 10 Index components other than outlook for expansion and business conditions which accounted for the small gain in the Index. Even though these improved, they still remain historically low. (Link to press 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.

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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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Inventories And Sales

The latest findings show that more firms are reducing inventory than building stocks. The excerpts below are from the latest monthly report (PDF format).

The pace of inventory reduction was steady, with a net negative 3 percent of all owners reporting growth in inventories (seasonally adjusted). So, on balance, more firms are reducing inventory than building stocks. The net percent of owners viewing current inventory stocks as “too low” worsened 1 point to a net negative 3 percent, mild dissatisfaction which will depress inventory investment. The net percent of owners planning to add to inventory stocks rose to a net 0 percent. While inventories have been building solidly at the national level, it appears that the small business sector is adding little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.

Credit Markets

Has the Fed's zero interest rate policy and quantitative easing had a positive impact on Small Businesses?

Six percent of the owners reported that all their credit needs were not met, unchanged and only 2 points above the record low. Thirty percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem. Thirty percent of all owners reported borrowing on a regular basis, up 2 points, typical of the expansion readings and historically near a record low. A net 5 percent of regular borrowers reported loans “harder to get” compared to their last attempt, near the record low. The average rate paid on short maturity loans was unchanged at 5.6 percent. The Federal Reserve policy has not been able to substantially lower the average rate paid by small firms for the past several years. Most if not all banks have set floors on acceptable loans, unwilling to make long term commitments at interest rates known to be artificially low and expected to rise.

NFIB Commentary

This month's "Commentary" section opens with the following observations:

Job growth was anemic in July with 209,000 as a first guess by the BLS. But the media rejoiced calling it “not too hot, not too cold”, just right for the Federal Reserve and the stock market. Really? Well, financial markets don’t want a hot economy because interest rates will rise causing asset values [to] fall. But the unemployment rate went up, not down although some excuse this as typical in a recovery when more re-enter the labor force. Total hours worked by all these workers barely increased. The Index of Total hours rose from 100.8 to 101.0, 2007=100. So, the total number of hours worked is virtually the same as in 2007, seven years later and after five years of “expansion”. Gains in part-time employment, offset by losses of full-time workers is not a good model for economic growth.

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.

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These two measures of mood have been highly correlated since the early days of the Great Recession.

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