Hiroshi Watanabe
This morning’s NFIB Small Business Optimism Index came in disappointing. The index was expected to show lower small business optimism, and the index is forecast to fall 0.1 point month-over-month to 93.6.
Instead, the decline The figure was much more dramatic, as it fell to 91.2, erasing all the gains from the summer. One factor that is likely at play and which we have seen in the past is political sensitivities.
Historically speaking, NFIB data have tended to be positively skewed during Republican administrations and vice versa. Put another way, optimism increases when Republicans are in power or expected to be elected, and optimism decreases when Democrats are in power or expected to win an election.
In Reaction to last month’s reportWe discuss how the recent surge in optimism earlier this summer coincided with the increasing odds that former President Trump will regain the presidency.
These latest figures, on the other hand, would reflect that the presidential race looks closer than before, and optimism seems to have diminished as well.
Looking deeper into the report, there’s not much to like. Of the data included in the optimism index, only two increased month-over-month: plans for capital expenditures and hard-to-fill job openings. The latter is by far the strongest category in the report, with August’s reading in the 92nd percentile of all months.
On top of that, there are four input factors to the optimism index and three other non-input factor categories that now sit in the bottom decile of readings. Some of these, such as changes in real earnings and expectations for higher real sales, also fell significantly month-on-month with monthly movements in the bottom decile.
As noted above, one of the weakest factors contributing to the optimism was changes in real earnings, and other “real” categories are similarly weak. In August, that index fell 7 points month-over-month. This is the largest single-month drop since October of last year, when it fell 8 points.
Even more impressive, that drop brings the index below the lows of spring 2020, marking the worst reading since March 2010. Among other categories of observed (rather than expected) conditions, employment change hit a new short-term low of -6.
This is the weakest reading for this index in two years. As we show in the Morning Lineup, combined with other categories of the labor market, the report is consistent with a further weakening of the labor market.
Returning to the topic of weak earnings change, the report details a number of reasons why small businesses are reporting lower profits. As shown below, the most common response in August was rising costs, which rose 2 percentage points to 16%. The next most common reason was sales volume, which was unchanged sequentially at 13%.
While those responses would suggest that the uptick in inflation has been hurting small business results, the report’s inflation gauge was somewhat mixed. More businesses continue to report higher prices than three months ago.
However, that index of higher prices has improved dramatically and in August fell to a new low of 20, the lowest level since January 2021.
While this figure remains elevated, at the 81st percentile of all months on record, it is well below the peak two and a half years ago and is consistent with slowing inflation. In addition, the share of firms reporting inflation as their biggest problem declined slightly from 25% to 24% and is well below highs near 35%.
Editor’s note: The summary points in this article were chosen by Seeking Alpha editors.