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NFIB Small Business Optimism Index slipped 0.6 in March to 104.7
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The Index of Small Business Optimism fell 0.6 points to 104.7, sustaining the remarkable surge in optimism that started November 9, 2016, the day after the election. Three of the 10 Index components posted a gain, five declined, all by just a few points, and two were unchanged. It is encouraging that the Index has held at historically high levels for five months. Optimism has not faded much and there is growing evidence that this optimism is being translated into more spending and hiring, although not at explosive rates. Consumer confidence is hitting new high levels and small business owners have not given up hope that their optimism will be rewarded with performance.
The surge in small business owner optimism was maintained in March, the fifth month of historically “off-the-charts” readings. Unfortunately, the expectation for economic growth is not off the charts. Official forecasts from the New York and Atlanta Federal Reserve Banks put first quarter growth at 0.9 percent or 2.9 percent as of March 31, hugely disparate estimates. Domestic spending, which excludes exports but includes imports will be a more important measure for small business owners. That should look better with consumer confidence surging, supported by solid job growth.
On the job side, the NFIB indicators are consistent with another low 200k job month. Hiring plans are strong and reports of past hiring solid. However, the inability of owners to find applicants that can satisfactorily fill open positions will become more of a headwind to job growth. Rising wages will attract some new participants into the workforce, but owners will also have to undertake more training to fill specialized positions. For example, the skill mismatch is restricting growth in housing construction which, in turn, is producing rising home prices. A “manufacturing renaissance” will also require solutions to the skill shortage.
The Federal Reserve is indicating that it will raise rates several more times this year. Given the poor economic performance of 2016 prior to the last rate hike, one might wonder what, exactly, does “data dependent” mean. That said, expect the Federal Reserve to persist with a few more hikes, which will have little impact on lending activity and may enhance availability: loan committees are still troubled making longer term loans at rates we used to pay to depositors. Higher rates make it more comfortable.
In the meantime, we wait for the “fiscal policy shoe” to drop. But actual spending won’t show up until 2018, if all goes well. Retroactive tax rate changes might help later this year. In the meantime, the only engine for growth is going to be the private sector and its confidence in Washington, D.C’s new management team. Hopefully, it won’t be shaken too badly by political antics.
Posted: April 11, 2017 Tuesday 07:00 AM