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First Cut: April NFIB Small Business Optimism Index highest since December 2018 with improved earnings and higher sales expectations

The NFIB Small Business Optimism Index shook off the less positive tone of the January-March months and rose to 103.5 in April, its highest reading since December 2018 when it was 104.4. The December level was the lowest of 2018 and reflected softer overall economic conditions. However, in the first quarter 2019, the 35-day partial federal government shutdown and stalled trade negotiations kept some activity in check. With the shutdown well in the rear view and a more positive outlook for no fresh imposition of tariffs — at least until earlier this week — survey respondent were finding the situation firmer at the start of the second quarter.

Eight of the 10 components were higher in April, one was unchanged, and one was down.

The April rise in the index was mainly due to an improved earnings trend (up 5 points to -3% in April versus -8% in March). The shutdown delayed payment of contracts for many businesses and the signing of new agreements into February and March. Additionally, there may have been some hesitancy in closing private contracts until there was greater certainty about costs that might have been expected by lack of a trade deal with China. At the time of the survey, survey respondents were more hopeful of higher sales (up 4 points to 20% in April after 16% in January, February, and March).

There were also good gains for the reading of credit conditions (up 3 points to -4% in April) and plans to increase inventories (up 3 points to 2%). For the former, there was briefly a dip in perceptions of credit conditions in March, perhaps related to the inversion of the yield curve on March 22 that heightened worries of a recession and instability in financial markets. However, it was a brief episode. It is clear now that it was more of a technical glitch and that the Federal Reserve is resolved to keep rates unchanged for now. For the latter, the plans to increase inventories were not large in the historical context and may have been due to catching up with some backlogs after putting plans on hold for a few months.

The remainder of the components exhibited only the usual small month-to-month variation and remain consistent with healthy growth.

In particular, the components related to the labor market do not appear to have stumbled much as businesses continue to expand payrolls and pay higher wages to fill positions, and increase their current workforce. The component for plans to increase employment (up 2 points to 20% in April) was the highest since December 2018 (23%) as businesses faced less immediate uncertainty and were again more optimistic about the outlook. Current job openings were essentially unchanged (38% in April after 39% in March) and in line with the peaks of available job openings in 2018. The subcomponent for actual compensation (34% in April after 33% in March) has been on the rise for the past two months after a slowdown in February. The reading suggests that businesses are still competing to attract and retain workers.

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