Small Business Optimism Falls

The small business optimism index fell 2.3 points in September to 103.0, led by a sharp drop in sales expectations, not only in states affected by hurricanes in Texas and Florida, but across the country. The surprising drop put the index at the lowest level of the year after hovering just below the 12 year high set in January, and came in not only below the consensus forecast of 105.4 but below the range of analysts' forecasts.

Of the ten components making up the index, 6 declined, 3 rose and 1 was unchanged. The most severe declines were registered in sales expectations, which fell 12 points to 15, and now is a good time to expand, falling 10 points to 17. But planned increases in capital outlays by small business owners also fell significantly, with the component shedding 5 points to 27.

Despite the sharp drop in sales expectations, the one bright spot of the report was the net percentage of small business owners planning to increase inventories, which rose by 5 points to 7, as more owners expected a strong quarter.

The employment front also remained very strong, with the net percentage of business owners planning to increase employment rising by 1 point to 19 while current job opening slipped by just a point to a still exceptionally strong 30.

Though the level of optimism remains very high by historical standards and despite the month's decline still surpasses any month in previous years going back to 2006, the September survey indicates the frothy expectations of business-friendly health reform and lower corporate taxes have cooled noticeably in September. Moreover, NFIB noted that optimism may have actually declined more than its survey indicates, since it was likely that reporting members in Florida and Texas were underrepresented because of disruptions.

Recent History Of This Indicator:
At 105.3 in August, the small business optimism index is at its best level in 12 years. Sales expectations are strong as are capital investment plans. Econoday's call for September is for steady and exceptional strength, at a consensus 105.4.