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First Cut: February NFIB Small Business Optimism remained strong, but survey taken before escalation of worries about spread of COVID-19

The NFIB Small Business Optimism Index eked out a small gain to 104.5 in February after 104.3 in January, remaining among the top 10% of readings, the report said. The uncertainty index dipped to 80 in February after 81 in January. However, NFIB Chief Economist William Dunkelberg said, “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”

The NFIB index joins other economic indicators that report good news for the economy that will largely be disregarded. In survey respondents’ view for February, 20% said economic conditions looked good for the future. That was the best since 26% in May 2019 and hinted at a lift for small business activity that is not going to materialize in the near term.

Four of 10 components were higher in February and six were lower. It is somewhat ironic that the February rise in the index was largely due to an 8 point jump in expectations for the economy to improve to 22%, the highest since 22% in November 2018 just as the slowdown in the global economy began to affect activity. I would anticipate a rapid reversal in next month’s report.

Credit conditions improved 3 points to -1% in February as banks competed for borrowers at a time when business investment is cautious. This was before the Fed’s rate cut on March 3 and the New York Fed acted to increase reserves on March 9. The plunge in the stock market and subsequent flight-to-safety over the past few weeks will likely lead to a deterioration in this component as well.

The component for higher sales had the largest decline and was 4 points lower to 19%. However, the reading retraced some — but not all — of a big gain in the prior month and was still a solid reading in comparison with recent months.

The other components showed only small and normal month-to-month movement.

The subindexes related to employment were overall solid in February with plans to increase employment up a bit and current job openings hovering near record highs for the series. For more about this, see the March 5 “On the radar: NFIB small business jobs report shows qualified workers remain scarce in February.”

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