Is Small Business Now Enjoying the Benefits of the Economic Recovery?

Is Small Business Now Enjoying the Benefits of the Economic Recovery?

One of the features of this economic recovery has been the fact that, as a business, the bigger you were the more you benefited from the Federal Reserve’s actions. Small business has been far slower to return to levels historically seen during an economic recovery. Based on the most recent results from the National Federation of Small Business (NFIB), that may finally be changing.

The NFIB just released their survey results for the month of December for their index called the Small Business Optimism index. The results were far better than anticipated and show that small business optimism has risen back to levels historically associated with an economic recovery. Keep in mind that an optimism survey reflects how people/businesses are feeling, not what specific action they are taking. The true test for the economy is whether this optimism translates to actual action. The important point is that big business and consumer optimism surveys were already reflecting optimism levels commensurate with an economic recovery while the NFIB survey was not. With today’s NFIB survey results, small business has joined the party.

Let us take a look at some of the components behind the headline news of the Small Business Optimism index. There are 10 subcomponents that make up the index. The good news is that 8 out of the 10 subcomponents rose, 1 was unchanged and only 1 declined. Here are the 10 subcomponents and their change from the November results.

  • Plans to Increase  Employment: up 4 points
  • Plans to Make Capital Outlays: up 4 points
  • Plans to Increase Inventories: up 3 points
  • Expect Higher Real Sales: up 6 points
  • Current Job Openings: up 1 point
  • Expected Credit Conditions: up 1 point
  • Now is a Good Time to Expand: up 5 points
  • Earning Trends: up 2 points
  • Current Inventory Levels: unchanged
  • Expect Economy to Improve: down 1 point

It is an interesting dichotomy that most of the components reflect sentiment that would exist when a business is expecting improvement in the economy and yet the only subcomponent that declined was their expectations for the economy. Perhaps this is a sign that small business has been hunkered down and not making any major changes and that they have now reached a point of hitting capacity. This would seem to explain how they can believe that the economy is going to weaken but still be making plans to increase capital outlays and increase hiring. Another factor that could support their sentiment that now is a good time to expand, increase inventories and make capital outlays could be the fact the financial institutions are back in the business of making loans and aggressively competing for new business.

One piece of the survey that could be good news for the average worker is the news that 54% of the respondents were trying to hire but 43% of them reported few or no qualified applicants for their open positions. This resulted in a 4 point increase in compensation paid to current employees and a 2 point increase in respondents’ plan to increase compensation. This is a nice offset to the Bureau of Labor Statistics report that average hourly earnings fell .2% in December.

The take away from the NFIB report is that small business has joined big business and consumers with regards to their level of optimism. As the Chief Economist for the NFIB stated: “There’s no question that small business owners are feeling better about the economy. If they continue to feel that way 2015 could be a very good year.”

About The Author

Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.