Thursday, March 13, 2014

Why all the pessimism in the NFIB Small Business Optimism Index?

The NFIB Small Business Optimism Index is still significantly below its long-running historical averages. A technical analyst would say that the index is unable to break a specific resistance level (dashed line below). The question is - what's capping small business sentiment in the United States?

If one looks at the overall corporate sector in the US, the CEO confidence, though quite volatile in the post-recession era, has stabilized. The recent shocks correspond to the Eurozone crisis as well as the US federal government's periodic budget games. In spite of all the uncertainty however, CEO confidence is at a reasonable (though lower) level relative to the pre-recession period (chart below). In contrast, that's certainly not the case with the NFIB's index (chart above).

Source: Vistage

Why hasn't the NFIB index participated in corporate CEOs' improvements in confidence? Part of the answer has to do with the fact that the majority of NFIB members are really small businesses - much smaller than what one would call "lower middle market".  According to the NFIB, 60% of its members have 5 or fewer employees and 55% of members have gross sales of $350,000 or less. That means that the overall sentiment of those surveyed may be closer to that of the US consumers as a whole than the more traditional corporate CEOs. And at least according to some surveys, the US consumer sentiment has not fully recovered. The U.Michigan sentiment index for example is still significantly below historical averages.

Sources: St.Louis Fed,

One can point to other reasons for this persistent weakness in the NFIB index. Small business sales growth has remained poor relative to many larger firms, resulting in slower hiring. Both of these factors are reflected in the index.

One of the key drivers of what some have been calling the "small business pessimism index" however is the uncertainty with respect to current federal government policies. It's no secret that the NFIB has been unhappy with Obamacare and that its members are heavily impacted by the prospects of rising taxes in the US. These issues continue to be the survey participants' top concerns. There is also some anecdotal evidence suggesting that at least some of the pessimism has less to do with business growth expectations and more to do with the frustrations with the Obama administration.


There is however a silver lining for the overall economy in these data. Small businesses are beginning to complain about "quality of labor" - something they weren't doing much a year ago. Hopefully that's a sign of US labor markets and demand for quality workers firming up a bit.
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