Research >> Economics
NFIB Small Business Optimism Index down 0.1 point to 94.4
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The Optimism Index was basically unchanged in May at 94.4, down 0.1 points. A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth. The individual indicators were mixed, with expected sales in a three month decline. However, some employment components improved and profit trends remained relatively stable after its sharp gain in April.
The Index did not go down by much, that’s the good news. The May reading is still at recession levels from an historical perspective, consistent with very anemic Gross Domestic Product (GDP) and employment growth.
The calculus of spending decisions requires an estimate of future sales, tax rates, interest rates and credit availability, labor costs, health care costs, regulatory compliance costs, all of which are very uncertain, meaning that owners cannot make reliable estimates of what will happen to these factors. Most of this uncertainty is coming out of Washington, D.C. Owners can’t attach probabilities to outcomes or even decide which outcomes to consider.
The amount of political manipulation and evasion to guide the spending of billions of taxpayer dollars is disturbing to owners. Sixty (60) percent of those surveyed said now is a bad time to expand their businesses; one-infour of those owners cited political uncertainty as the main reason, second only to concerns about a weak economy. Investing in jobs or plant and equipment will remain at “maintenance” level until this is resolved.
The Index averaged 100 from 1973 to the end of 2007, but has averaged 90 since then, over five years of below average performance. Over ten questions in the Index, net positive responses would have to be 100 points higher just to get back to the average. In a recovery, it should be posting above average readings.
Developments in Europe probably have their most damaging impact on the economy through adversely impacting uncertainty and expectations. A financial meltdown there will translate into less confidence in our ability to support the U.S. banking system even though direct exposure is not large. Capital flight from European asset investments will roil U.S. markets. There will be lots of financial news and speculation. On the real side, if Europe does slip into a broader and deeper slowdown, exports will be adversely impacted.
The April gains in the employment, sales and profits indicators did hold up pretty well in May, a comforting sign. Inflation is clearly not a problem; reported interest costs are a tad lower. But expectations for business conditions and sales remain weak and those drive decisions to hire and invest.
Posted: June 12, 2012 Tuesday 07:30 AM