Optimism among small business owners cooled in December after November's surge to 13-year highs, with the NFIB Small Business Optimism Index falling 2.6 points to 104.9. Leading the monthly index below the range of analysts' expectations and 3 points below the consensus forecast was an 11-point drop in expected business conditions to 37 and a loss of 8 points to minus 1 in plans to increase inventories. Only two of the ten components of the index posted gains, five declined, and three remained unchanged. Despite the monthly drop, however, NFIB said 2017 was the strongest year in the 45-year history of the index, as measured by the monthly average, which at 104.8 beat the previous record of 104.6 set in 2004.
Helping to dampen optimism in December were expectations of real sales, down 6 points to 28, plans to increase employment, down 4 points to 20, and earnings trends, which dropped 5 points deeper into negative territory to a minus 15, by far the worst performance among the components.
The two rising components, plans to make capital outlays and current job openings, both posted only feeble 1-point gains, albeit achieving high levels of 27 and 31, respectively.
While the December index level may be disappointing, the NFIB pointed out the reading remains one of the strongest in the history of the index, as November's 107.5 was bested only by the 108.0 record posted in July 1983. Moreover, throughout the year much of the optimism reported by the survey hinged on expectations of the passage of business-friendly tax reform, and the likely positive reaction to the signing of the decidedly business-friendly Tax Cuts and Jobs Act on December 22 was probably not captured in the December survey.
The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.
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