The headline number for the NFIB Small Business Optimism Index surged to its highest level in over six years last month, coming in at 105.1. December's reading marks the 2nd consecutive month the index has been above the historical average of 97.9 and was higher than the forecast of 101.3. The index is at the 95th percentile in this series.
Here is an excerpt from NFIB Chief Economist Bill Dunkelberg in the latest news release:
"Optimism on Main Street continues to grow with the improved economic outlook following the election. Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year."
The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize the dramatic change in small-business sentiment that accompanied the Great Financial Crisis and the COVID-19 pandemic. Compare, for example, the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings following the Great Recession that ended in June 2009. For much of the last two years, as a result of the COVID pandemic and high inflation, small business sentiment closely resembles that of the Great Recession and its aftermath. With that said, the last two readings have skyrocketed to pre-pandemic levels.
The next chart is a closer look at the indicator since the turn of the century. Notice a nearly identical jump in the index following the 2016 and 2024 elections.
The average monthly change in this indicator is 1.4 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.
NFIB Small Business Survey Components
The small business survey is made up of 10 components. In December, seven increased, two decreased, and one was unchanged.
Business Optimism and Consumer Attitudes
The next few charts are overlays of the Business Optimism Index with two of the main measures of consumer attitudes: Conference Board Consumer Confidence and University of Michigan Consumer Sentiment Index. The Consumer Confidence Index is influenced by employment and labor market conditions from the worker's perspective whereas the Michigan Sentiment Index is more focused on employment conditions from the business perspective. (For more information on how these indexes measure up against each other, check out our monthly update Two Measures of Consumer Attitudes: MCSI vs. CCI).
In our first chart comparing the NFIB Small Business Optimism Index with the Conference Board Consumer Confidence Index, we can see that the consumer measure is the more volatile of the two. Therefore, it is plotted on a separate axis to give a better comparison of the two series from the common baseline of 100.
Next, we compare the NFIB Small Business Optimism Index with the University of Michigan Consumer Sentiment Index. Again, we've plotted each index on a separate axis, however in this chart, we can see that the business measure is more volatile of the two.
Despite the volatility though, we can see that these two measures of mood (business and consumer) have been highly correlated, falling and rising together for the most part. A decline in Small Business Sentiment was a long leading indicator for the first two recessions of the century, but clearly not for the Covid-19 recession.
