US: NFIB Small Business Optimism Index

January 10, 2017 05:00 CST

Consensus Consensus Range Actual Previous
level 99.6 98.9 to 100.0 105.8 98.4

The small business optimism index soared 7.4 points in December to 105.8, the highest reading since December 2004. The outsized increase far exceeds expectations and follows a robust 3.5-point rise in November. NFIB said business owners who expect better economic conditions accounted for about half of the overall increase, with a net 50 percent of respondents expecting that the economy will improve, a 38 point leap up from November.

In a magnified repetition of the survey results for November, all but 2 of the 10 components posted gains. The two other optimism components making a big contribution to the index were higher real sales expectations, up 20 points to 31, and the view that now is a good time to expand, which was up 12 points to 23.

Capital outlays also figured prominently, with plans to increase capital spending jumping 5 points to 29 and 63 percent of respondents reporting outlays in December, 8 points more than in November. Even earnings trends were up 6 points, but remained in negative territory at minus 14.

Optimism was somewhat subdued on the jobs front, however, as plans of owners to increase employment rose just 1 point to 16 and current job openings registered a 2-point decline, albeit to a still strong 29. According to NFIB, the labor market is getting tighter, allowing workers to ask for better wages, but small business owners are not yet confident enough to raise prices to offset any increase in labor costs. Higher interest rates apparently accounted for the drop in the other declining component, expected credit conditions, which fell 2 points to minus 6.

Market Consensus Before Announcement
The small business optimism index jumped sharply in December, boosted by rising expectations for economic growth and higher sales to go with it. Job openings are very strong in this report as are plans to increase employment. And in one of the few indications of strength for future business investment, plans to increase capital outlays have been holding at high levels. At a consensus 99.6 for December, forecasters see the index adding to November's 1.9 point post-election surge to 98.4.

The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.

Small businesses are responsible for a majority of new job creation and the NFIB focuses on this sector of the economy. The direction of the health of small businesses can portend changes in the stock market - especially small caps.