Small Business Optimism Surges: What Does It Mean for the Economy?

The December 2016 issue of the NFIB Small Business Economics Trends came out on Tuesday morning, and things are looking up for small business owners. Or, better put, business owners expect things to look up in the coming state of the economy.

Results from the latest National Federation of Independent Business’s survey of 619 NFIB members on small business confidence showed a dramatic spike in optimism—NFIB’s index rose to 105.8, the highest it’s been since 2004.

Why the spike in small business confidence? What does it mean for the economy as a whole? Here’s what you need to know.

What Does the NFIB Small Business Economics Trends Survey Measure?

The NFIB Research Foundation has collected data on small business economics trends since 1986, with quarterly and monthly surveys. Not all small business owners are surveyed—only those drawn from NFIB’s membership.

What you really need to know about the index lies in the topics the NFIB asks its members to address. They ask about the small business owners’ views on:

• Plans to increase employment
• Plans to make capital outlays
• Plans to increase inventories
• Expectations on the economy 
• Real sales expectations
• Current inventory
• Current job openings
• Expected credit conditions
• Expansion status
• Earnings trends

The NFIB then combines the results from the 10 questions to create their index, to reflect the current state of small business economics.

Which Results Should Catch Business Owners’ Attention

Overall, 7 of the 10 Index components showed gains, 2 declined, and 1 stayed where it was.

Which results are particularly revealing?

Expectations of business conditions and real sales spike

Small business owners’ expectations for better business conditions and higher real sales take up the biggest chunk of the overall increase of 7.4 points from last month’s results.

The number of NFIB members who think the economy will improve—and improve conditions for small businesses along the way—shot up by 38 percentage points. The number of NFIB members who think that real sales will rise in the new state of the economy rose as well, up 20 percentage points since last month. That being said, the actual increase in sales improved by just one percentage point despite a surge in consumer confidence in December—the highest it’s been since 2001.

The results in these two components are in line with small business owners’ increased optimism that the incoming administration of Republican President-elect Donald Trump will enact big tax cuts, loosen regulations, and up infrastructure spending—all moves that could boost corporate spending and investments.

It’s important to note here that “the NFIB membership appears to be disproportionately Republican, so it is possible that the data will start overstating strength, opposite the pattern during the Obama administration,” says Jim O’Sullivan, chief U.S. economist at research consultancy High Frequency Economics.

Overall, confidence measures have been moving up, according to O’Sullivan.

Plans to hire aren’t there

Even though small business optimism is at a 12-year high, the index shows that small business owners aren’t looking to significantly increase their workforce.

NFIB members plan to add 0.01 workers per firm, and job openings dropped two points. These results show that business owners aren’t feeling ready to raise prices to make up for the higher costs of labor. Many business owners have said they won’t make hiring plans until their revenue has increased.

The Big Picture for the Economy

The main takeaway is this:

While the NFIB Small Business Economics Trends show an increase in small business optimism, hiring and sales are somewhat flat. 

If job creation and sales numbers do start looking better, small business optimism could sustain this rise and the economy would benefit from increased risk taking and investment.

We can’t be sure of the good things to come, though, until small businesses see the new administration’s policies in place for themselves.

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from Fundera Ledger https://www.fundera.com/blog/small-business-optimism