Small Business Sentiment: Highest Since May 2012

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The June update for May came in at 94.4, which, despite a 3.2 point gain, remains in the lowest quartile of this indicator across time at the 22nd percentile in this series. A more optimistic view is that the index is its highest since its 94.5 reached twice since the onset of the Great Recession, first in February 2011 and 15 months later in May 2012. The index ended a sustained, 14-year cycle above this level in January 2008, the month after the onset of the Great Recession.

Here is an excerpt from the opening summary of the report:

While May's reading is the second highest since the recession started December 2007, the Index does not signal strong economic growth for the sector. Eight of 10 Index components gained momentum, showing some moderation in pessimism about the economy and future sales, but planned job creation fell 1 point and reported job creation stalled after five months of gains.

"Small business confidence rising is always a good thing, but it's tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis, and while the stock market sets records, GDP posts mediocre growth. The unemployment rate remains in the mid-7s and it is departures from the labor force —- not job creation — that is contributing to its decline when it does fall. It's nice to see confidence not shrinking, but there isn't much to hang your hat on in this report. We are back to where we were in May 2012. Two good months don't make a trend, but we can't have a trend without them, so it's a start." -- NFIB chief economist Bill Dunkelberg

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.

The average monthly change in this indicator is 1.29 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

Inventories And Sales
The findings on small business sales and sales expectations continue to highlight a fundamental source of distress.

Credit Markets
Has the Fed's strategy of quantitative easing had a positive impact on Small Businesses?

NFIB Commentary
This month's "Commentary" section offers a interesting context for the May data:

Business Optimism and Consumer Confidence
The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.

With the latest NFIB data, we continue to see that the mood of small businesses is highly correlated with Consumer Confidence.