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NFIB: Small Business Survey Rises Modestly in May

June 14, 2016

by Jill Mislinski

The latest issue of the NFIB Small Business Economic Trends is out today. The headline number for May came in at 93.8, up 0.2 from the previous month's 93.6. The index is at the 20th percentile in this series.

Today's number came in at the Investing.com forecast.

Here is an excerpt from the opening summary of the news release.

The Index of Small Business Optimism rose two tenths of a point in May to 93.8, a negligible increase showing no real enthusiasm for making capital outlays, increasing inventories, or expanding, according to theNational Federation of Independent Business (NFIB).

"The bottom line is that without an empowered small business sector, the economy will grow at a mediocre pace," said NFIB Chief Economist Bill Dunkelberg. "Politicians in Washington credit any insignificant growth in the economy to their policies, but realistically, it’s the increase in the population. At this point, we should expect the same slow growth for the rest of the year."

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 following the Great Recession that ended in June 2009.

NFIB Optimism Index

Here is a closer look at the indicator since the turn of the century. The post-recession interim high of 100.4 occurred in December 2014.

NFIB Optimism Index Since 2000

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.

NFIB Optimism Index Moving Average

Here are some excerpts from the report.

Labor Markets

Fifty-six percent reported hiring or trying to hire (up 3 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Hiring activity increased substantially, but apparently the “failure rate” also rose as more owners found it hard to identify qualified applicants.

Inflation

How effective has the Fed's monetary policy been in lifting inflation to it two percent target rate?

Gas prices are up 15 percent so far this year as oil prices rebound from very low levels. However, this will not be sufficient to get the Fed’s preferred inflation measure over the 2 percent goal they have set.

Credit Markets

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

Four percent of owners reported that all their borrowing needs were not satisfied, 2 points above the record low reached in September 2015. Thirty-one percent reported all credit needs met (unchanged), and 52 percent explicitly said they did not want a loan. Only 1 percent reported that financing was their top business problem compared to 23 percent citing taxes. Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged).

NFIB Commentary

This month's "Commentary" section includes the following observations:

Federal Reserve Chair Yellen and her minions are now talking the financial markets into believing that a rate hike is in the offing. According to market indicators, there is a 40 percent probability for a June hike and a 60 percent probability for July, up from 4 percent before the campaign began. However, these estimates have likely changed in light of the most recent BLS numbers. But the message is the same, rates will go up a whole 25 basis points IF the economic data support it. Well, what does that tell us? Nothing. It’s obviously true, a tautology.

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 it is plotted on a separate axis to give a better comparison of the two series from the common baseline of 100.

NFIB Optimism and Consumer Confidence

These two measures of mood have been highly correlated since the early days of the Great Recession. However, The two have diverged since their interim peaks (December 2014 for NFIB and January 2015 for Consumer Confidence). A decline in Small Business Sentiment was a leading indicator for the last two recessions. Are we now seeing a comparable early warning?