Small Business Optimism: Back to Pre-Recession Levels

January 13, 2015

by Doug Short

The latest issue of the NFIB Small Business Economic Trends is out today. The January update for December came in at 100.4, up/down 2.3 points from the previous month. The index is now at the 63.2 percentile in this series and at a new post-recession high, its highest level since October 2006.

The forecast was for 97.9.

Here is the opening summary of the news release.

The NFIB Small Business Optimism Survey rose 2.3 points to 100.4 in December, its highest level since October of 2006, with positive gains in eight of 10 indices, a strong signal that American small businesses could be finally shaking off the effects of the Great Recession.

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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Here are some excerpts from the report.

Labor Markets

Fifty-four percent reported hiring or trying to hire, but 43 percent reported few or no qualified applicants for the positions they were trying to fill. Fourteen percent reported using temporary workers, down 1 point. Twenty-five percent of all owners reported job openings they could not fill in the current period, up 1 point from November and a very solid reading. This anticipates a further reduction in the unemployment rate even if job creation is not especially strong.

Credit Markets

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

Four percent of the owners reported that all their credit needs were not met, holding at the historic low. Thirty-two percent reported all credit needs met, and 52 percent explicitly said they did not want a loan. 2 points. The average rate paid on short maturity loans fell 50 basis points to 5.1 percent. Loan demand remained historically weak.

NFIB Commentary

This month's "Commentary" section opens with some observations about the mid-term election:

The BEA reported a blow-out economy in Q3 and Q4 appears to have been OK. But “low rates for too long” never produced the spending surge the Federal Reserve expected. As pointed out years ago in this report, the economy would heal itself in spite of the impediments and distortions government policy put in place, allowing the Federal Reserve to declare “victory” even if its policies were counterproductive as many observers and even some Federal Reserve officials believed. The cost of the QEs is far from clear and remain to be determined. Certainly QE1 was the right move, but only financial markets were the primary beneficiaries of subsequent actions, not the real economy. Fiscal and regulatory policy have provided no help, forcing firms to spend more of their scarce resources complying with record amounts of regulation and leaving the budget and tax policy floating without direction. The budget deficit has declined by a trillion dollars mostly without the benefit of major spending cuts or priority realignments.

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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