The NFIB published its latest Small Business Economic Trends report covering sentiment among small businesses this morning. As discussed in the Morning Lineup, at the headline level the report came in weaker than expected with optimism dropping to 89.9 versus expectations of an increase to 92.3. That leaves sentiment at the lowest level since last May.
Under the hood, that weaker sentiment number was a result of overall bad breadth including a couple of sizeable moves. The single largest move in January was the drop in expected real sales. That index went from a reading of -4 down 12 points to -16. That month-over-month decline is the largest since June 2022 and ranks as the ninth largest in the history of the survey. Actual earnings changes also marked a significant decline falling 5 points month over month. Conversely, two indices rose month over month: inventories and plans to increase inventories.
As previously mentioned, sales metrics were notably weak with sales expectations dropping significantly. Actual sales changes (which is not a component of the optimism index whereas sales expectations are) are still in contraction and in the bottom decile of all periods on record, but the January reading was unchanged month over month. That clashes with actual earnings changes which fell to -30 which is down at the low end of the past several years’ range. Ironically, that worsening of earnings comes despite firms reporting an easing in inflation. The higher prices index fell 3 points to 22. That is now out of the top decile of readings and at the lowest level in three years.(Click on image to enlarge)
Prices are not the only area hitting a new local low. Hiring plans have continued to collapse with back-to-back declines over the past two months. That index is now at the lowest level since May 2020. While that reading marks a deterioration in labor conditions versus earlier in the post-pandemic period, we would note that current levels are still above the historical median. Additionally, actual employment changes came in at zero meaning firms on a net basis neither hired nor fired. Meanwhile, compensation has appeared to have bottomed for the time being. Compensation plans, on the other hand, have peaked, but are still elevated indicating. Finally, we would note that the percentage of respondents reporting openings as hard to fill is down to a three-year low.(Click on image to enlarge)
Overall, the report was a bit of a mixed bag if not leaning slightly negative. The share of respondents reporting now as a good time to expand reflects this with a reading that is still historically low albeit unchanged at multi-month highs in January. Digging deeper, economic conditions are overwhelmingly the main culprit for this expansion outlook. The political climate is the next largest factor, although we would note that the NFIB survey has historically tended to be sensitive to politics and leans Republicans (historically during Republican administrations the expansion outlook is better than when Democrats are in power). Financials and interest rates also rank highly for those reporting a negative outlook. Granted, at 7% of responses, that is down significantly from 12% only two months ago.
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