Small Business Sentiment Improved in March

April 8th, 2014

by Doug Short

The latest issue of the NFIB Small Business Economic Trends is out today. The April update for March came in at 93.4, up 2 points from the previous month's 91.4. Today's headline number is at the 19.7 percentile in this series. Since its initial recovery following its Great Recession trough, this index has been stuck in an extremely volatile range for the past three years. Since January of 2011, it has repeatedly bumped a ceiling around the 94.5 level and then retreated.

The forecast was for 92.3.

Here is the opening summary of the news release.

"Overall, the March gain more or less reversed the February decline. While the Index still can't seem to get above 95, we can be encouraged that the economy is at least crawling forward and not heading in reverse," said NFIB chief economist Bill Dunkelberg. The outlook for real sales gains accounted for about half of the improvement with inventory satisfaction and inventory investment plans accounting for most of the rest. However, throughout this recovery we've seen these types of increases only to have them go nowhere. As long as Washington continues to ignore policies that could restore the middle class, job creation will continue to be sub-par." (Link to news release).

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 four 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 inventories and sales shows improvement but remains negative. The excerpts below are from the latest monthly report (PDF format).

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past 3 months compared to the prior 3 months improved 2 points to a net negative 6 percent. With more firms experiencing lower sales than higher quarter over quarter, the weakness in sentiment is no surprise. Fourteen percent cite weak sales as their top business problem, high but approaching levels experienced in "normal" times.

Credit Markets

Has the Fed's zero interest rate policy and quantitative easing had a positive impact on Small Businesses?

Credit continues to be a non-issue for small employers. In March only 5 percent of owners reported that all their credit needs were not met, 1 point above the record low. Thirty percent reported all credit needs met, and 48 percent explicitly said they did not want a loan. Only 2 percent reported that financing was their top business problem compared to 21 percent citing taxes, 21 percent citing regulations and red tape and 14 percent citing weak sales.

NFIB Commentary

This month's "Commentary" section opens with the following observations:

First quarter GDP growth is looking pretty slow at just under 2 percent. Weather, trade deficits, and pessimistic consumers and business owners are all taking a toll on spending growth. Uncertainty remains elevated. Consequently, hiring will remain muted compared to previous expansions. There is lots of talk about this looking more like a "new normal", that the nature of job requirements changed dramatically in the recession. Certainly firms trimmed all the fat and then some in the last 6 years, but technological change wasn't that dramatic since 2008. Many of the "long term unemployed" would find jobs in an economy with 500,000 more housing starts and a consumer base more willing to spend on services. Washington is floundering and the economy is following suit.

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.

These two measures of mood have been highly correlated since the early days of the Great Recession.

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