Small Business Optimism: Moderate Improvement, But No Clear Direction

November 11, 2014

by Doug Short

The latest issue of the NFIB Small Business Economic Trends is out today. The November update for October came in at 96.1, up 0.8 points from the previous month. In characteristic style, today's report subtitle underscores the theme of the report: "Moderate Improvement, But No Clear Direction". The index is now at the 29.1 percentile in this series, below its post-recession 96.6 high in May and back to a level it last consistently achieved in October 2007, two months before the last recession.

The forecast was for 95.1.

Here is the opening summary of the news release.

The NFIB Small Business Optimism Index crept back to its August level of 96.1 with a gain of 0.8 points led by a modest increase in the net percent of owners who plan to increase capital spending and more who expect higher sales in the next 3 months. (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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Here are some excerpts from the latest monthly report (PDF format).

Labor Markets

Labor markets, although improved, are still sloshy. Seasonally adjusted, 13 percent of the owners (unchanged) reported adding an average of 2.7 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (unchanged) an average of 2.9 workers, producing the seasonally adjusted net gain of 0.0 workers per firm overall. Twenty- four percent of all owners reported job openings they could not fill in the current period, up 3 points, a good sign for improvements in the unemployment rate. Job creation plans improved a point to a seasonally adjusted net 10 percent. Not a lot of strength in these numbers but consistent with steady growth in employment.

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, returning to the historic low. Twenty-nine percent reported all credit needs met, and 53 percent explicitly said they did not want a loan (67 percent including those who did not answer the question, presumably uninterested in borrowing as well). Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 22 percent citing regulations and red tape and 12 percent citing weak sales. Eleven percent complained about the availability of qualified labor.

NFIB Commentary

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

Voters and non-voters sent a clear message last Tuesday. For those who voted, most didn’t approve of the status quo. For those who didn’t vote, they weren’t persuaded to endorse any candidate. The question is, how much can the Republicans get done with the President holding his veto pen at the ready. Some of his supporters have counseled him to veto everything the Republican Congress sends his way. That would certainly be bad for the economy. There are over 300 bills sitting in the Senate that were passed by the House over the past 6 years, many by bipartisan majorities. But, if the President won’t negotiate, all Congress can do is pass them and send them to the Oval Office.

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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