This article was written by Doug Short in its original format. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.
The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten components and is meant to provide an indication of of the overall health of small businesses in the country. The latest issue of the NFIB Small Business Economic Trends came out this morning. The headline number for April dropped to its lowest level since January 2013, coming in at 89.0, down 1.1 from the previous month and below the Investing.com forecast of 89.6. April's reading remains below the series average of 98.2 for the 16th consecutive month. The index is at the 5th percentile in this series.
Here is an excerpt from the opening summary of the news release and a snapshot of the components month-over-month performance.
“Optimism is not improving on Main Street as more owners struggle with finding qualified workers for their open positions,” said NFIB Chief Economist Bill Dunkelberg. “Inflation remains a top concern for small businesses but is showing signs of easing.”
The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis and now the COVID-19 pandemic. Compare, for example, the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings following the Great Recession that ended in June 2009. A similar pattern happened beginning in 2019 and dropped drastically during the COVID-19 pandemic. Even after the bounce back, readings continue to drop.
Here is a closer look at the indicator since the turn of the century.
The average monthly change in this indicator is 1.3 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots. The latest 3-month moving average is at 90.0, its lowest value since March 2013.
Business Optimism and Consumer Confidence
The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so it is plotted on a separate axis to give a better comparison of the two series from the common baseline of 100.
As the chart illustrates, the two have tracked one another fairly closely since the onset of the financial crisis. The two have diverged at brief periods and been highly correlated at others. A decline in Small Business Sentiment was a long leading indicator for the previous two recessions (but clearly not for the Covid-19 recession). At this point in time, they have both been generally declining since June 2021.
ETFs associated with sentiment include: Consumer Discretionary Select Sector SPDR Fund (XLY).
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