Looking Under The Headline NFIB Small Business Optimism Index Level

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by: David I. Templeton, CFA

One area that could show an early sign of weakness resulting from the trade/tariff headlines is in sentiment levels, specifically, sentiment of consumers and business. Just Tuesday the NFIB Small Business Optimism Index report showed small businesses remain highly optimistic. The report noted,

  • "The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May."
  • "Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983."

Juanita Duggan, NFIB President and CEO, stated, "Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits. The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow."

Additionally, the NFIB survey reports on a number of individual components with some comprising a part of the Index calculation. Below is a chart noting three specific components that saw declines from the prior month; i.e., expectations around an improving economy, whether or not it is a good time to expand and actual versus expected sales levels.

Although the sales related components are at a high level as seen in the bottom third of the chart, both the expected and actual sales percentage declined by five percentage points. The blue line on the middle chart represents the percentage of firms reporting it is a good time to expand and this category declined five percentage points as well. And lastly, the top of the chart relates to the percentage of respondents expecting an improved versus slower economy and this percentage declined by four percentage points. In my view, if small businesses begin to expect a slowing business environment is forthcoming, and maybe due to trade concerns, this type of sentiment reversal can feed on itself and contribute to a slowdown in the economy. Although the four select components above have seen a recent decline though, they remain at a high level.

Evaluating this type of data is useful in that it can provide some lead time into a potential slowing of the economy; hence, a negative impact on the equity market. In my post at the end last week, The Economy Is More Than Just Jobs, I highlighted the tick higher in the long term unemployed, i.e., those unemployed for 15 weeks or longer. This is an example of another data point that can lead on economic slowdown. At the moment though, much of the economic and company data is decidedly positive.