The small business optimism index fell 0.2 points in April to 104.5, a smaller than expected drop maintaining the bulk of the record-setting increases of the post-election months that pushed the index up to the highest level in 12 years. Although analysts were expecting a more sizeable decline, and the reading indicates the continuation of a very high level of optimism among small business owners, a key component of the index, expectations for future business conditions, did fall 8 points, perhaps reflecting discouragement from Congress' failure to repeal and replace Obamacare in March.
But April was the sixth straight month of historically high optimism, a streak not seen since 1983, according to the NFIB. Five of the components of the index rose, three declined and two were unchanged. The gainers were led by current job openings, which rose another 3 points to a still stronger reading of 33, followed by 2 point increases in now is a good time to expand to 24, current inventory to minus 3, and expectations of higher real sales to 20. Plans to increase inventories rose 1 point to 3.
The 8 point drop to 38 in expectations that the economy will improve led the decliners, although the component remains the strongest within the index despite the drop. Also registering a decline were plans to increase capital outlays, down 2 points to a still strong 27, and credit conditions expectations, down 1 point to minus 4. Unchanged at 16 were plans to increase employment, while earnings trends remained as the least optimistic component at minus 9.
If the failure to remedy the high cost of healthcare was indeed behind the drop in optimistic future expectations, then last week's narrow passing by the House of a bill to repeal most of Obamacare could bring that reading up again in the May survey, though any progress on tax reform or lack thereof is also likely to have a big impact on this volatile component.
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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