Small Business Optimism Index Falls

Doubts about future economic growth diminished optimism among small business owners to the lowest level in 26 months, according to the NFIB's Small Business Optimism Index, which fell 3.2 points in January to 101.2, below consensus expectations as well as the range of analysts' forecasts. Though still above the long-term average of 98, the optimism reading has retreated sharply from the 45-year high set last August, and the fall in January mainly reflects a 10-point drop to a net 6 percent in expectations that the economy will improve, a 7-point decline to a net 16 percent in expectations that real sales will be higher, and a 7-point drop to a net 1 percent in plans to increase inventories.

The decline was broad-based, however, with 7 of the 10 components of the index retreating: plans to increase employment fell 5 points to a net 18, current job openings fell 4 points to a net 35 percent, the view that now is a good time to expand was down 4 points to a net 20 percent, and the view that current inventory is too low fell 2 points to a net minus 3 percent.

Somewhat muting the slide of the overall index was a 1-point rise to a net 26 percent in plans to make capital outlays, a rise of 1 point in expected credit conditions to a net minus 5 percent, and a 2-point increase to a net minus 5 percent in earnings trends.

NFIB highlighted the 35-day government shutdown and financial market instability as contributors to the increased uncertainty driving down optimism among small business owners in January.

Despite a less glowing outlook, current small business operations remained quite strong, with strong hiring, hiring plans, and job openings, as well as solid inventory and capital spending, according to the survey. Small businesses added a net 0.33 workers per firm in January, the highest reading since July, and reports of higher worker compensation rose to a net 36 percent, the second highest level in the survey's history. The net percent of owners reporting inventory increases rose 4 points to a net 7 percent, matching the strongest reading since April 2000, and a net 60 percent reported capital outlays, just 1 point less than in December and well above the recovery average.