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Chart of the Week
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June 23, 2014

Small business sentiment: better, to a point
NFIB Small Business Optimism Index and Hiring Plans subindex

chart

Source: Bloomberg, as of 5/31/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line:

  • Optimism on Main Street has been a missing ingredient in the current recovery; so it's welcome news that the National Federation for Independent Business optimism index (a popular measure of small business sentiment) rose in May to its highest level since September 2007.
  • That said, this improvement must be taken with a grain of salt. For one thing, it simply brings the index close to the long-term average.
  • Indeed, the NFIB's report notes that the data is well below the levels that normally accompany a robust expansion.
  • While positive progress was made in the various sub-indexes that underpin the overall optimism index, nothing indicates an economy firing on all cylinders. For example, although the hiring plans sub-index saw notable improvement in the past year, it remains below pre-2008 levels.
  • This positive but limited upswing in small business optimism is paralleled by the modest economic growth seen in the second quarter – certainly welcome but not enough to force the Fed's hand, based on its recent statements.
  • If that continues, normalization may proceed more slowly, with potential for the positive but cautious business environment seen this last year to continue a bit longer.

The Chart:

  • The chart shows the NFIB's Small Business Optimism Index (blue line) and the sub index of Hiring Plans (green columns) from May 2004 – May 2014.
  • The long black dotted line represents the inception average (Oct 1974) of the optimism index and the short black dotted line represents the average of the optimism index since the latest recovery began in June 2009.
  • Note the clear upside breakout in the optimism index to the best level in almost seven years, but that level is still below the inception average.
  • Note too that the hiring plans sub index has been much stronger over the past year or so than during the previous five.

Context & Perspective:

  • The NFIB's small-business optimism index is comprised of ten sub-indexes: plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations for the economy to improve, expectations for real (inflation-adjusted) sales to be higher, current inventories, current job openings, expected credit conditions, "now is a good time to expand" and earnings trends.
  • The small business optimism index is viewed as a leading indicator of overall economic activity; the small business sector has historically been the engine of new job creation in the US.
  • According to the NFIB, four components of the index are most closely related to GDP and employment growth: job openings, job creation plans, inventory and capital spending plans.
  • The NFIB's small-business optimism index increased from 95.2 in April to 96.6 in May; it was the highest level since September 2007; the third consecutive gain and better than the expected rise to 95.8. However, that level is still below the index average of 97.9 and even further below what the NFIB says normally accompanies an expansion.
  • NFIB noted that the level was still far below readings that normally accompany an expansion.

Definitions:

The NFIB Small Business Optimism Index is produced by the National Federation of Independent Business from data compiled in its monthly survey on small business owners that belong to the NFIB.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.


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