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First Cut: December NFIB Small Business Optimism Index reflects solid underlying conditions

The NFIB Small Business Optimism Index was little changed in December at 104.4 from 104.8 in November and quite similar to the 104.9 in December 2017. The uprush in index readings that occurred earlier in 2018 has dissipated along with the “sugar high” of fiscal stimulus. It is probably also the case that uncertainties about costs and supply chain delays related to trade and tariffs pushed activity around to get ahead of anticipated imposts on foreign goods and services.

A reading in the low 100’s remains a robust one and it appears that businesses are settling in for a return to more moderate economic growth. The headline was in line with market expectations and should not be a source of disappointment. Rather, it reinforces that the underlying economy is expanding and should continue to do so, if at a lower pace.

The index components suggest that the gloss has worn off outsized expectations for expansion without showing any substantive deterioration in conditions. It is a more realistic view of the potential for expansion.

Four components were higher and six were lower. The size of the declines was almost offset by the increases. The declines were in the forward-looking components. The largest was for the economy to improve which fell 6 points to 16% in December, now is a good time to expand which fell 5 points to 24%, and plans for capital expenditures which was down 4 points to 25%. None of these are bad readings in the historical context. Rather this is similar to other data points during a moderate expansion.

A positive note for the report is that the components associated with employment suggest that hiring has not cooled. Plans to increase employment nudged up 1 point to 23% in December, remaining on track for adding jobs at a healthy pace. Current job openings was up 5 points to 39% in December, a record high. The subcomponent for actual compensation ticked up 1 point to 35%.

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