NFIB Small Business Survey: 'Small Business Owners Deeply Uncertain About Future'

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By Jill Mislinski

The latest issue of the NFIB Small Business Economic Trends came out this morning. The headline number for September came in at 94.1, down 0.3 from the previous month's 94.4. The index is at the 21st percentile in this series. Today's number came in below the forecast of 95.2.

Here is an excerpt from the opening summary of the news release.

The net percent of small business owners who expect better business conditions in the next six months jumped 12 points last month, according to the NFIB Small Business Economic Trends Report (SBET), released today, but that gain was erased by significantly weaker inventories and hard-to-fill job openings.

According to NFIB Chief Economist Bill Dunkelberg, small business owners won't be hiring or building inventories - both of which signify confidence in the economy - until something changes in Washington.

"It is quite clear that the top issues for small-business owners will not be addressed this year," said Dunkelberg. "The presidential election is so divisive that it offers little promise of a bipartisan effort to deal with any of these important issues."

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example, the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings following the Great Recession that ended in June 2009.

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Here is a closer look at the indicator since the turn of the century. The post-recession interim high of 100.4 occurred in December 2014.

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The average monthly change in this indicator is 1.3 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

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Here are some excerpts from the report.

Labor Markets

Fifty-eight percent reported hiring or trying to hire (up 2 points), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Seventeen percent of owners cited the difficulty of finding qualified workers as their single most important business problem.


How effective has the Fed's monetary policy been in lifting inflation to its two percent target rate?

The lack of "inflation" on Main Street continues to contribute to the Federal Reserve's frustration. The net percent of owners raising average selling prices was a net negative 1 percent (down 4 points), this in contrast to a net 70 percent raising average prices in the 1970s. Clearly the small business sector can produce "inflation".

Credit Markets

Has the Fed's zero interest rate policy and quantitative easing had a positive impact on Small Businesses?

Six percent of owners reported that all their borrowing needs were not satisfied, up 2 points from August. Only 1 percent reported that financing was their top business problem. Thirty-two percent of all owners reported borrowing on a regular basis (up 3 points). The average rate paid on short maturity loans rose 100 basis points to 6.2 percent. Overall, loan demand remains historically weak, owners can't find many good reasons to borrow and invest, even with abundantly cheap money.

NFIB Commentary

This month's "Commentary" section includes the following observations:

The Federal Reserve has started its usual "hide the rate hike" game, sending observers looking under every rock of data to see if there are 25 basis points underneath. Most of the "rocks" look like pebbles, there's not a lot of growth in the economy. The Fed thinks it is the determining force shaping interest rates, not markets, a very troubling view. One Fed president said "Long-run expectations for policy rates provide an anchor to long-run interest rates," continuing with "So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path." In other words, if the Fed says it will keep short rates low, long rates will be low as well.

Business Optimism and Consumer Confidence

The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so it is plotted on a separate axis to give a better comparison of the two series from the common baseline of 100.

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These two measures of mood have been highly correlated since the early days of the Great Recession. However, the two have diverged since their interim peaks (December 2014 for NFIB and January 2015 for Consumer Confidence). A decline in Small Business Sentiment was a long leading indicator for the last two recessions. Are we now seeing a comparable early warning?