February 10th, 2012
With small businesses representing some 70% of overall job creation in the United States, dealers have started to pay closer mind to lending activity and sentiment surveys covering the segment. On February 7, following its survey of 600 small businesses, Gallup reported that hiring intentions were the highest in four years. Nevertheless, seven out of 10 respondents to that poll said they planned to augment payrolls only with temporary, contract or part-time workers. Dealers will now look to the more widely followed National Federation of Independent Business Small Business Optimism Index on Tuesday for evidence, from 20 distinct aspects, of rising sentiment among independent business owners.
Investec Securities suggested jobs beget optimism. “NFIB has picked up in recent months and we suspect that it is no coincidence that this has also been a period of better jobs numbers.” One of the requirements of a self-sustaining recovery, however, is that optimism begets jobs, allowing a virtuous cycle. To this end, and calling for a 1.2-point gain to 95.0 in January, ING Securities notes a reasonably good correlation between the NFIB index (with a four-month lead) and annual GDP growth. Meanwhile, economists at Lloyds Bank Wholesale Banking & Markets indicated, “The NFIB small business survey will give greater insight into the structural improvements we believe are underway. However, official numbers are also likely to prove encouraging.”
With a courageous call for a 2.7-point rise to 96.5, Societe Generale Cross Asset Research expect the NFIB series to echo reported improvements in the Institute for Supply Management (ISM) activity barometers. If realized, the small business optimism index will have risen for a fifth consecutive month in January and stand at its highest reading since September 2007 (97.3). SG believes the steady uptrend in consumer confidence since last August also bolsters their call for NFIB to return to pre-recession readings. “Indeed, the correlation between the Reuters/University of Michigan sentiment index and the NFIB measure since 2001 has been 89%.” There’s an even stronger correlation to the U Mich current conditions component, which rose to 84.2 in the late-January reading. Its 4.6-point gain over the prior month makes SG’s outlying estimate for the NFIB headline all the more plausible.
Taking a higher altitude view, HSBC Economics (e: 94.3) would like to see further advances in the economic outlook component of the survey, which has already rallied from -26 in August to -8 in December. “This component may continue to improve in January, with fewer firms expecting economic conditions to weaken.” HSBC has a below-consensus estimate on both NFIB and retail sales out later the same morning.
While abstaining from giving a point estimate for the index, IFR Markets economists believe, “The construction-heavy survey will likely benefit from the recent upward trend in housing starts (despite a correction in December) and construction spending overall, while solid employment figures and slowly improving credit conditions should be boons to small businesses in general. The Fed’s latest Senior Loan Officer Opinion Survey (SLOOS) noted significantly increased demand for loans from small firms. Though there was little reported change in credit standards for commercial and industrial loans, many expected credit quality to improve, and the increased demand implies a better outlook among entrepreneurs. Furthermore, consumer sentiment appears to be trending stronger (if with some hiccups), which should help carry small business sentiment up as well.”
Citigroup Global Markets pits the NFIB data against the SLOOS (borrower versus lender) and thinks the more upbeat NFIB responses will triumph. “The Fed survey data did show some lessening of eased credit for the small business sector, but recent NFIB surveys do not look worrisome on the credit front. Indeed, some pickup in lending activity was noted.”
Fixed income strategists at CRT Capital included NFIB SBOI in its economic data watch list for next week, writing in its Treasury Weekly, “The week ahead offers a mass of data with anticipated gains to Retail Sales, CapU and IP, NFIB optimism, Import Prices, NAHB, Housing Starts, Philadelphia Fed and, phew, even CPI. We think all this should matter and the anticipation for firming in pretty much every one of them has to temper any bullish inclination and encourage the bearish one. If not for Greece, of course.”
Dealers will be especially mindful of the “real” components of the NFIB index, since these (plans for job creation, inventory investment and capital spending) are highly correlated with expected real sales (around 70 percent). Planned capital expenditures are already at a 42-month high and more firms in December said now was a good time to expand than any time in the previous three years. Some dealers require further signs of tightness in the labor market, which would come from the percentage of firms reporting they have one or more hard to fill job vacancies. This index spent 2011 in a dull range between 12 and 16 but finished the year at 15, on the strong side of the full-year average (14). Wage payments to small business employees appear to be increasing as well, and having an inflation aspect this may warrant the Fed’s attention.
While not the most widely followed indicator, as the first data point of the coming week, the NFIB Small Business Optimism Index has the potential to set the tone for markets for the remainder of the week. Strong internal components will not only validate “real” indicators already reported, they will contribute to revised expectations of the Fed’s commitment to keeping the funds rate low through the end of 2014. The bond market’s relative indifference in Q1 to positive economic news may not survive.