Anticipating GOP Control, Small Business Owners Increasingly Optimistic

Small-business owners are slightly more optimistic in the month of November, according to a new report from the National Federation of Independent Business released Tuesday. The gain, which moved up last month above its long-run average, is reflective of the optimism related to the coming change in Congressional leadership.

The National Federation of Independent Business’s small-business optimism index jumped by a large 2.0 points to 98.1 in November, which puts the index just slightly above its average of 98.0 from 1974 to 2014.

Economists surveyed by The Wall Street Journal expected the index to rise to 96.5 in November from 96.1 in October.

“Expectations for business conditions six months out rose a huge 16 percentage points while expectations for real sales volumes rose 5 percentage points,” Bill Dunkelberg, the NFIB’s Chief Economist said in a statement.

Still, the NFIB sought downplay the large increase of its own index by citing two subindexes as impacting the increase and fundamental economic strength still lacking.

“Unfortunately, the Index did not sprint past the average which is typical of a strong recovery before settling back down,” Dunkelberg added. “Instead it’s been a slow slog just to reach this point. It’s a little early to declare a breakout. This performance will have to be consolidated by several more positive readings before owners are confident to hire more employees and expand their business. But it’s a good sign that comes at a good time for small business.”

The increase above the average took the Index to its highest level since February 2007, while the average of the Index from 1974Q4 to 2014 to the present is 98 and includes all the Great Recession readings. The subindex, which includes real sales expectations, jumped 5 percentage points to 14 percent last month, as the subindex covering business conditions expectations increased by a whopping 16 points to 13 percent.

These subindexes cover what small business owners think will happen in the future and the NFIB said the gains are “likely not a response to ‘Black Friday’ or ‘Small Business Saturday’ results” but rather “a response to the November election results.” Republicans won enough seats to expand their majority in the House and retake a 54-seat majority in the Senate next year, the latest being the defeat of Sen. Mary Landrieu (D-LA).

Still, as PPD recently reported, the U.S. economy is still fundamentally weak, despite the increased job creation. The NFIB report concludes the same and adds to that basic interpretation, as owners report taxes as the “single most important small business problem” in November, followed by “government regulations and red tape.”

“Third quarter real GDP growth was revised up to 3.9 percent making the 6 months in the middle of 2014 one of the best growth periods in decades. However, this didn’t do much for small business job creation in the U.S.,” Dunkelberg said. “One reason is that a lot of this growth has been driven by inventory building, unusual defense outlays and exports, selling around the world, an activity that doesn’t involve many small businesses.”

Dunkelberg also noted that economists’ expectations for growth in the fourth quarter “are not as rosy, reverting to the high 2 percent pace.” This is particularly concerning considering the underlaying data in the report.

“What didn’t improve were the four ‘hard’ index components: job creation plans, plans for capital outlays, job openings and inventory investment plans,” the report said.

A one-step forward and two-steps back theme is reoccurring in the NFIB report. According to the survey results, the job creation subindex barely moved up 1 percentage point to 11 percent in November, but the capital-spending plans subindex dropped 1 point to 25 percent. The subindex covering jobs that are difficult to fill held steady at 24 percent, and the inventory subindex dropped 1 point to 2 percent.

Hiring over the past three months was slightly positive. The seasonally adjusted average increase in workers per firm was 0.05 workers a firm, up from 0 in October. According to the NFIB, 12 percent of firms reported increasing employment an average of 3.6 workers, but 10 percent reported reducing their workforce by an average of 3.3 workers, resulting in a canceling out affect.

Of those who reported a need to find qualified workers, 85 percent said they were seeing few or no applicants who were qualified for the open positions.

Another trend that is working against small businesses, said the NFIB, was the lack pf pricing power. Seasonally adjusted, a net 4 percent of owners have raised selling prices recently, half the percentage saying they raised prices in October.

Similarly, the Wells Fargo/Gallup Small Business Index rose to 58 this month, the highest recorded since the recession in 2008, according to Gallup Editor-in-Chief Frank Newport.

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