The NFIB Small Business Optimism Index was up 3.5 points to 94.4 in May, halting the slide lower that began in March when measures to combat the COVID-19 pandemic started to ramp up. The upward move reflected only slightly improved current conditions, while the six month outlook brightened in spite of higher uncertainty. The increase doesn’t fully retrace recent declines but it is a move in the right direction.
The uncertainty index was up to 82 after 75 in April. Usually greater uncertainty would drive the index lower. However, the April decrease from 92 in March probably reflected the arrival of government support programs, the impact of which has now be absorbed. In the greater scheme of things, uncertainty is generally more elevated than it was before COVID-19, but businesses are acclimatizing to its presence and starting to make plans again.
Eight of 10 index components were higher in May and two were lower.
The component for now-is-a-good-time-to-expand inched up 2 points to 5%, a reading that suggested only cautious activity. The component for expectations-for-the-economy-to-improve was up 5 points to 34%, its highest since 34% in August 2018. It probably isn’t that business expect activity to return to the heights that marked much of 2018 before contentious trade negotiations played a part in adding uncertainty to the outlook. Rather, that a solid and quick rebound from the present recessionary conditions is hoped for.
The largest contribution to the increase in the index was an 18 point jump in expectations-for-higher-sales to -24% after falling to -42% in April. This is due to some reopening of activity in May. The component for the earnings-trend was down 6 points to 26%, its lowest since -24% in February 2014.
Plans-to-increase-inventories were up 6 points in May to 2%, the first positive after two months of negatives and much more in line with the pre-COVID-19 trend. Satisfaction with current-inventories was up 2% to -5 and suggested only a slight lifting of caution in the present situation.
Plans to increase capital expenditures were up 2 points to 20% in May and were still relatively low compared to the past year or two. Nonetheless it is a hint that some business investment could resume if the economy starts to pick up.
It was also noted that credit conditions were more in line with pre-COVID-19 readings with a 2 point increase to -4%. Efforts on the part of the central bank and government programs to ensure the flow of credit probably was behind the improvement.
The NFIB published its data related to the labor market on June 4. Overall, plans to increase employment and compensation remained limited. Current job openings were still scanty although employers were seeing more applicants with desired skillsets. See Whetstone Analysis “On the radar: NFIB small business jobs report shows average change in employment down in May for first time since September 2017”.
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