from the National Federation of Independent Business

The remarkable surge in small business optimism that began in November of last year was sustained in March.

[editor’s note: Market expectation from Bloomberg / Econoday was between 104.0 to 107.0 (consensus 104.8) versus the actual reading of 104.7.]

Said NFIB President and CEO Juanita Duggan:

Small business owners remain optimistic about the future of the economy and the direction of consumer confidence. We are encouraged by signs that optimism is translating into economic activity, such as capital investment and job creation.

The April data (due out in May) will tell us much more about how small business owners are processing the events in Washington. We know they have struggled under Obamacare, and that taxes are a major concern. Congress’s failure to keep its promises could dampen optimism, and that would ripple through the economy.

The Index slipped 0.6 points in March to 104.7, still a very strong reading. Actual earnings, capital expenditure plans, and job-creation plans posted gains in March. Sales expectations, which have been flying high for months, dropped by 8 points, a sign that the Optimism Index could be moderating after a strong run.

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Said NFIB Chief Economist Bill Dunkelberg:

By historical standards, this is an excellent performance, with most of the components of the Index holding their gains. The increases in capital expenditure plans and actual earnings are signs of a healthier economy, and we expect job creation to pick up in future months.”

Dunkelberg noted that while the overall Index remained strong in March, a significant increase in the Uncertainty Index, a subset of data on how small business owners see the near-term future, could indicate trouble on the horizon.

The Uncertainty Index hit 93 in March, which is the second highest reading in the survey’s history,” he said. “More small business owners are having a difficult time anticipating the factors that affect their businesses, especially government policy.”

Most of the March data were collected before Congress failed to pass a bill repealing and replacing Obamacare. A big reason for the soaring optimism of the past five months is the expectation among small business owners that Obamacare and other burdensome policies will be reversed by Congress and the new administration.

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Report Commentary:

The surge in small business owner optimism was maintained in March, the fifth month of historically “off-the-charts” readings. Unfortunately, the expectation for economic growth is not off the charts. Official forecasts from the New York and Atlanta Federal Reserve Banks put first quarter growth at 0.9 percent or 2.9 percent as of March 31, hugely disparate estimates. Domestic spending, which excludes exports but includes imports will be a more important measure for small business owners. That should look better with consumer confidence surging, supported by solid job growth.

On the job side, the NFIB indicators are consistent with another low 200k job month. Hiring plans are strong and reports of past hiring solid. However, the inability of owners to find applicants that can satisfactorily fill open positions will become more of a headwind to job growth. Rising wages will attract some new participants into the workforce, but owners will also have to undertake more training to fill specialized positions. For example, the skill mismatch is restricting growth in housing construction which, in turn, is producing rising home prices. A “manufacturing renaissance” will also require solutions to the skill shortage.

The Federal Reserve is indicating that it will raise rates several more times this year. Given the poor economic performance of 2016 prior to the last rate hike, one might wonder what, exactly, does “data dependent” mean. That said, expect the Federal Reserve to persist with a few more hikes, which will have little impact on lending activity and may enhance availability: loan committees are still troubled making longer term loans at rates we used to pay to depositors. Higher rates make it more comfortable.

In the meantime, we wait for the “fiscal policy shoe” to drop. But actual spending won’t show up until 2018, if all goes well. Retroactive tax rate changes might help later this year. In the meantime, the only engine for growth is going to be the private sector and its confidence in Washington, D.C’s new management team. Hopefully, it won’t be shaken too badly by political antics.