The latest issue of the NFIB (National Federation of Independent Business) Small Business Economic Trends is out today (see report). The heavily watched Small Business Optimism Index is trying to break above recessionary levels. The fractional increase in February puts the index at the highest level since December 2007, the start of the last recession. This level, however, remains well below the levels achieved at the end of the two previous recessions.
Here is the opening paragraph (bolded text in the original):
The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into “second gear” for economic growth. Gross Domestic Product (GDP) growth in the fourth quarter was revised lower due to a large fall off in inventory building and weaker consumer spending than initially estimated. “Weak sales” still get the most votes by owners as their top business problem. Seven Index components advanced or were unchanged and three fell, but all of the changes, positive or negative, were small.
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, but the recession mentality still pervades the small business community.
Inventories and Sales: A Mixed Message
Elsewhere in the report we learn that “The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a net negative 11%, 23 points better than March 2009 [the month the market bottomed], but still indicative of weak customer activity.” The percent of owners expecting higher real sales continued to rise. However, plans to add to inventories declined, which is consistent with weak sales trends and not consistent with the improved outlook for real sales volumes.
Business Optimism Beginning to Outpace 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.
As the chart illustrates, in recent months the Small Business Optimism Index has started to show a faster recovery than the Conference Board’s measure of Consumer Confidence. This is a general trend observed following the two recessions prior to the Great Recession. The trend has not yet become established in the current data to the extent previously seen. In the current recovery small business sentiment and consumer confidence have remained very closely coupled and have diverged only moderately over the past 6-7 months.
Consumer Confidence at Three Year High but Still Low by Doug Short