The National Federation of Independent Business monthly survey released Tuesday shows a big jump in small-business optimism in November, but a closer look through the numbers suggests that we temper our enthusiasm.
After all, small-business optimism remains below its high-water mark for this cycle, not to mention well below a pre-recession average that stretches all the way back to the early 1980s, as this chart shows:
Now, the incoming Trump administration has offered up plans for tax cuts, increased government spending and regulatory relief -- all of which seems likely to create a surge of continued optimism among business operators. But rival initiatives the Trump team is bandying about on trade and other issues seem to work at cross-purposes, and the net result of this could simply end up confusing small-business owners and customers.
Of course, "confusion" is just another word for "uncertainty" -- and uncertainty makes the return of small-business optimism to pre-recession levels much less likely until today's political rhetoric turns into tomorrow's actual policies. As that won't happen until after Inauguration Day, small-business optimism remains a weak reed on which to rest any economic outlook.
It's also worth noting that a source of improved optimism among NFIB survey respondents seems to be expectations for better sales. Such expectations rose 10 points in November to a net 11% of small-business owners. But as this chart illustrates, there's a sharp divergence between higher expectations for future sales and what's actually happening with current sales:
Actual sales continue to trend lower, as do actual small-business hiring and capital expenditure:
Now, one underpinning of the Federal Reserve's easy-money policy has been that low rates would kick off capital spending. But as we can see in the chart below of future small-business capex and hiring plans, that's not happening.
As the Fed put various rounds of quantitative easing into effect in recent years, small businesses planned to hire more people, but not build out capacity. But as this chart shows, plans for both have more or less trended sideways since 2015 began:
What Will the Fed Think?
Anecdotal evidence throughout Federal Open Market Committee minutes shows that the Fed cares about small-business sentiment.
The central bank's likely takeaway from Tuesday's report is that it's nice that everyone is feeling better about the economy, but that the FOMC shouldn't leap too far ahead of the facts when raising rates. All in all, Tuesday's NFIB report does nothing to change my expectation that the Fed will hike short-term rates on Wednesday but temper enthusiasm for doing more next year.
My bet is that as the central begins to raise short rates, markets will pull longer-term yields up in anticipation of future growth. And if this expected growth actually materializes, I predict that capital expenditure will shift quite a bit higher despite increased interest costs. After all, what matters most to business-capex spending isn't the cost of capital, but how much confidence companies have in the outcome.
Confidence comes from the certainty of stable, forecastable federal policy -- a concept the Trump administration will have to grasp once it's driving what the U.S. government will or won't do next.