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NFIB Small Business Optimism Index rose 0.4 points to 95.2


The Index of Small Business Optimism rose 0.4 points in December, increasing to 95.2. The Index is stuck in a “below average” rut, characterizing the performance of the small business sector. Historically accounting for about half of private GDP, below average growth for small businesses has not been offset by strong growth in large firms. Combined, they are producing 2.5 percent growth overall. With the manufacturing sector in decline, large firms aren’t likely to add as much to growth in 2016. Auto sales have been strong, but will likely fade in 2016. The service industry has also grown with solid spending in health care, so health insurance costs will likely also rise, an unfortunate outcome for small business owners.

The Federal Reserve finally pulled the trigger and raised 25 basis points. Chair Yellen observed that the Fed had not reached its inflation goal of 2 percent based on the PCE deflator or its new goal of “maximum employment” (metrics unspecified). While experts will puzzle over what data would satisfy those criteria, the larger concern is that the Fed has been unable to reach either of its objectives using the tools available to them. Another puzzle, why is the Fed trying to attain 2 percent inflation when inflation by this measure has averaged less than that for decades, an accomplishment that should be celebrated. It looks like a mindless exercise. The goal was set some time ago and the reasons were vague and unclear. But now, the Fed marches toward it regardless, reluctantly leaving zero rates behind. If inflation does hit the 2 percent target, how will policy change?

The December survey results probably came in too early and the sample is small to allow much interpretation as a response to the Fed move. In the same month Congress made permanent expensing and other favorable tax changes that had an immediate impact on bottom lines whereas most borrowers already have their cheap loans. However, prospects for any other substantive policy changes in 2016 are not good. The President appears to be shifting his attention to foreign policy and guns. Congress has a lot of - economic growth supporting legislation under consideration, but most is politically difficult to pass or unlikely to receive Presidential approval. And savings at the pump in 2016 may be offset by losses at the light switch if EPA regulations for power generation are put in force.

The net effect of the changes in monetary and fiscal policy were less than impressive in December as reflected in owner expectations and plans. However, the January survey, mailed January 1st and collected through the month, may provide a clearer picture as owners respond to policy changes enacted. It is unlikely that 2016 will produce any major changes as the politics of the election will suck the oxygen out of serious policymaking.

At 95.2, the Index stands well below its 42 year average of 98 and below its highest levels in this recovery, reached late in 2014 (readings of 98 and 100 in November and December, 2014). Labor market Index components maintained their solid (for this expansion) readings, supporting a continuation of recent job growth experience. Capital spending was solid in November and December, but may be a “one off” response to tax changes effective for spending completed by December 31. Overall, current economic climate is a prescription for a continuation of 2.5 percent growth.




Posted: January 12, 2016 Tuesday 07:00 AM




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