The National Federation of Independent Business (NFIB) Small Business Optimism Index for May was released this morning. Small businesses remain a vital segment of the American economy and are just one economic sector that displayed a sizable jump in confidence following the election in November. The increase in small business confidence was particularly striking, and was the largest move since the NFIB began administering its monthly survey in 1986.
One question in the survey is the single most important problem the respondent’s business is currently facing. The answer does not play a direct role in the index calculation, but the changes seen in the response to this question between October 2016 and May 2017 are revealing. Overwhelmingly, the largest single change was in the number of business owners reporting that regulation was their biggest problem [Figure 1]. This isn’t completely surprising, given the Trump administration’s promise of a looser regulatory environment —small businesses often don’t have the scale to respond to regulations as easily as large business can and increased regulation can be more disruptive. Labor concerns have replaced some of the regulatory focus, especially the kind of skill mismatches that make it difficult to find the right person for the job.
While the figure above highlights the biggest changes, not surprisingly taxes remain the largest concern overall (22% of all survey respondents), nearly unchanged since the election; followed by quality of labor (19%).
There is also some interesting internal data on what drove the big jump in optimism. The increase was primarily driven by economic expectations, followed by net companies responding that it was a good time to expand. While economists only increased growth expectations modestly following the election, lifting 2017 expectations about 0.2% according to Bloomberg data, expected improvement in the regulatory environment may reasonably be having an impact on economic expectations as perceived by small businesses.
So far, increased uncertainty around the timing of legislative changes has done little to dampen small business optimism. At the same time, a lack of improvement in the pace of economic growth or hiring signals that optimism has not yet translated to economic activity. But when there are changes, watch for the possibility that small businesses may lead the next stage of the expansion.
The economic forecasts set forth in the presentation may not develop as predicted.
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