Tuesday, June 10, 2014

Small Business Rightly Optimistic

Maybe small businesses are just too slow to get it.  They are most optimistic just as volatility has reached levels that many smart economists argue screams complacency.  It has not been since September 2007 that small business were last this optimistic.

Looking at this confidence reading as such it may indeed seem that everywhere we turn, signs of froth abound, that central bank liquidity provided is being mis-used.  However, we should recognize more importantly that the last time small businesses were this optimistic; it was as they were coming from a much higher level of confidence and their confidence was quickly shrinking. 

We might instead look at the last time this index moved from below a reading of 95 to above as it had just last month.  That would have been back in March ’03, 3 months before the Fed provided its last (25 basis point) measure of accommodation in a series of moves that left the fed funds policy rate at 1% for an additional year.  After that recovery from slightly below 95, the index remained above 95 till late ’07.  During those 4 years, U.S. real GDP grew from 1.6% to 4.4% a year later and remained above 2.2% until late ’06. 

Looking back a little further in ’93, the NFIB Small Business Index rose again from below 95 where real GDP had just marked 2.3%.  A year later real GDP registered 4.3% and stayed at or above 2.3% until late ’01.

Given what had been seen the last times small businesses became more optimistic, we might expect real GDP to move to 4% or more by this time next year.  While small business may not have all of the resources that larger firms have, they do seem to know when to get excited. 

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