The NFIB Small Business Optimism Index fell for a fifth month in a row, down 3.7 points to 101.2 in January. It was the lowest since 98.4 in November 2016. If the index is off the record high of 108.8 in August 2018, the present reading represents a return to a more sustainable level of confidence in business conditions for smaller firms. It is consistent with a healthy and moderately expanding economy. NFIB survey respondents appear to be coming down from the burst of optimism that accompanied the prospect of changes in tax law enacted in December 2017 which would normally see some less elevated readings. The swift decline in the last two months is probably related to the emergence of greater risks to the outlook from a slower global economy and disruptions associated with the federal government funding impasse and 35-day long partial government shutdown that could well be repeated in the near future.
Nonetheless, it bears repeating that this is still an index level associated with decent economic growth in the historical context. Provided the index settles to a trend around the 100-mark in coming months, the recent fall-off should be interpreted as a return to more realistic expectations about growth and present business needs. If business optimism is less giddy, it is by no means absent.
Among the index components, three were higher and seven were lower. Those that were higher – capital expenditure plans, credit conditions, and earnings trend – showed no more than a normal month-to-month variation of a point or two.
The largest decline was for expectations for the economy to improve which fell 10 points to 6% in January, its lowest level since -7% in October 2016. This reflects the heightened uncertainties and seems especially severe after the peaks of 2018. However, in the historical context, this is probably a more normal reading.
Plans to increase inventories plunged 8 points to 1% in January, but it should be noted that this a not an unusual level for this component. There were some strong readings in 2018 related to trade policy as businesses sought to stock up before the imposition of punitive tariffs, first in the summer months and then again in December. This also represents a more normal response to present economic conditions.
The story is similar for expectations for higher real sales which fell 7 points to 16% In January. Anticipation that growth will return to more moderate levels is consistent with a milder pace for future sales.
While there were declines in the components associated with the labor market, the levels are not at all bad in the longer-term trend.
Plans to increase employment dipped 5 points to 18% in January, the same as in May 2018. Current job openings were off 4 points to 35%, below the record of 39% in December 2018, but still quite strong. The subcomponent for actual compensation rose 1 point to 36% and only just below the peak of 37% in September 2018. Businesses may be hiring at a less hectic pace than in recent months, but they also are in a position where it is necessary to increase wages and salaries to attract and retain workers.
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