Small-business sentiment slips, but still near all-time high

Alley Gallery is a small business in Evanston, Illinois.

By Mindy Tan

Optimism amongst small-business owners slipped in February and fell short of analyst expectations, even as it remained at one of its highest readings in 43 years, according to the National Federation of Independent Business Small Business Optimism Index.

The index fell 0.6 points in February to 105.3; this is short of analysts’ median expectation of 105.6, according to Bloomberg.

The decline follows the largest month-over-month increase in the survey’s history in December and another uptick in January, noted NFIB in a press release.

While sentiment remains strong, Ian Shepherdson, chief economist at Pantheon Macroeconomics questioned why this has not translated into greater spending on business equipment and other capital expenditures.

Just 26 percent of small business owners said they were planning capital outlays in the next three to six months, according to NFIB. These figures are historically weak and have yet to reflect the optimism about sales and business conditions that have been reflected in the index since President Donald Trump was elected.

“We are disappointed by the one-point dip in capex plans, which are now slightly below their pre-election level. So far, at least, the remarkable improvement in business owners’ sentiment is not translating into increased spending plans,” said Shepherdson in a note.

“We hope the gap will narrow, via rising capex plans, over the next few months.”

Only three out of the 10 components in NFIB’s Small Business Optimism Index rose in February.
Source: National Federation of Independent Business

Ross Martens is the co-owner of Alley Gallery in Evanston. He said he is “fairly optimistic” about business.

“We’ve been having a pretty good couple of years,” said Martens. “It is usually a quiet time of the year but it hasn’t been [this year]. After the holidays people aren’t thinking about spending a lot of money, and, I have found over the years, the cold and snow keeps people in their houses. So it’s probably not specific to us but we usually slow down during the February and March period. But this year we’ve had pretty mild weather.”

Ross Martens is the co-owner of Alley Gallery, a custom framer in Evanston, Illinois.

Martens said they may expand the store’s four-person team, which comprises the two co-owners, a full-time employee, and a part-time staff member.

“It’s varied between three and six employees for probably about 10 years now. Maybe, if things continue to be busy, we may hire another part-timer but so far we’re handling the workload fairly well.”

Of the 10 sub-indicators of the Small Business Optimism Index, only three – plans to increase inventories, current inventory, and current job openings – increased.

The job openings component reached its highest level since December 2000. At the same time, more owners reported difficulty finding qualified workers.

“Many small business owners are being squeezed by this historically tight labor market,” NFIB Chief Economist Bill Dunkelberg said in the release. “They are not confident enough to raise prices on consumers, which limits how much they can increase compensation and makes them less competitive in attracting qualified applicants.”

“It looks like the sentiment is still fully sustaining the bounce we’ve seen since the election,” said David Sloane, senior economist at 4CAST-RGE, in a phone interview.

“They do seem to be pricing in fiscal stimulus and deregulation from the new administration. But to what extent the administration will deliver is still rather uncertain so I certainly would say the risk is this surge in optimism will fade,” said Sloane. “I don’t think there is any immediate trigger that will send things into reverse; I think it will be a slow unwind unless we get some major shock. But at the moment it’s holding up pretty well.”

That the sentiment reading has managed to remain near record highs for three consecutive months is encouraging, suggesting that the rise in confidence has staying power, said Admir Kolaj, economic analyst at TD Economics, which is part of TD Bank Group.

“Expectations surrounding reduced regulatory burdens, along with healthcare and tax reform, were important contributors to the boost in post-election optimism, ” said Kolaj in a note. “Still, delays and alterations for the path of major legislation could temper optimism over the coming months.”

Photo at top: Alley Gallery is a small business in Evanston, Illinois.