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NFIB: Small Business Survey at Two Year Low

April 12, 2016

by Doug Short

The latest issue of the NFIB Small Business Economic Trends is out today. The headline number for March came in at 92.6, down 0.3 from the previous month's 92.9. The index is at the 16th percentile in this series.

Today's number came in below the forecast of a rise to 93.9.

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

The Index of Small Business Optimism fell 0.3 points from February, falling to 92.6. Statistically, no change. Four of the 10 Index components posted a gain, six posted small declines, the biggest gain was in Expected Business Conditions, a 4 point improvement to a still very negative number.

For a broader perspective, the Index has turned decidedly "south" over the last 15 months falling from a reading of 100 in December 2014 to 92.8. A "chartist" looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal. The April survey will decide whether or not the alarm should be rung. This month’s change was not statistically significant, just not in a positive direction.

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.

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

Reported job creation improved in March, with the average employment change per firm rising to an average gain in employment of 0.02 workers per firm, not much, but positive. Thirteen percent (up 2 points) reported increasing employment an average of 2.2 workers per firm while 12 percent (down 1 point) reported reducing employment an average of 4.3 workers per firm. The gain is positive, but small, suggesting employment gains will continue to be modest but sufficient to keep the unemployment rate steady.


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

In spite of the Fed’s best efforts to generate inflation (an event most citizens would not want), inflationary pressures remain dormant on Main Street. Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, for the third month in a row. More evidence that the Fed’s policies aimed at producing inflation are not working.

Credit Markets

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

Five percent of owners reported that all their borrowing needs were not satisfied, 3 points above the record low reached in September, 2015. Thirty-one percent reported all credit needs met (unchanged), and 53 percent explicitly said they did not want a loan. For most of the recovery, record numbers of firms have been on the “credit sidelines”, seeing no good reason to borrow. Only 2 percent reported that financing was their top business problem compared to 22 percent citing taxes, 21 percent citing regulations and red tape and 13 percent citing poor sales. When credit is an issue, owners report it as illustrated by 37 percent reporting credit hard to get in the early 1980s compared to 5 percent today.

NFIB Commentary

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

Apparently, New York Federal Reserve President (and FOMC Vice Chair) William Dudley’s walk back of prospects for a second rate hike in Hangzhou last month was not satisfactory, so Chair Yellen added her support to keeping the status quo. Financial markets applauded, but the real sector did not, with consumer and small business sentiment falling.

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 volatility 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.