Small Business Optimism Index
The COVID-19 pandemic has put significant stress on the financial health of small and medium-sized businesses (SMBs), severely impacting sales, employment, and expansion plans. However, the September Small Business Survey report by the National Federation of Independent Business (NFIB) reflects a newfound degree of optimism amidst the uncertainty headed into the final quarter of 2020.
The SMB Optimism Index came in at 103.9 for September, up 3.8 points from August and well ahead of consensus forecasts. Historically, the Optimism Index leads the tail of a recession with a major rebound off of the lows. The September value is just half of a point off from the pre-COVID February level of 104.4, and already up 12.7 points from the low of 91.2 in April.
Diving deeper into the underlying components of the index, we can see that all but one component has improved. Notably, expectations to increase inventories, expectations to increase employment, and current job openings are either at or near all-time highs.
There has been a significant divergence between expected versus actual inventory levels—a pattern that has been repeated in the tail-end of all prior recessions of the past thirty years. We believe this reflects a runoff of excess inventory that was built-up in the years prior to the recession, marking a healthy transition back to a level of production that is in-line with demand. SMBs are expected to spur more production, imports, and hiring in the coming months as they finish this cycle.
In short, expectations for a speedy recovery are looking up for SMBs. When asked if they expect economic conditions to improve over the next 6 months, 32% more owners expressed a positive, rather than negative, outlook. This spread nears pre-COVID sentiment levels, indicating general optimism for the economy going into 2021. However, while the optimism has certainly recovered, the real economy paints a different picture. Even though business owners are optimistic about the future, most are hesitant to bet on it. More than 85% of SMB owners reported no desire to expand their business within the next 3 months.
At the end of August, after the loan application window for the PPP closed, the NFIB reported that 84% of borrowers had used up their entire loan. Still, 40% of small business owners reported that they would be forced to permanently close down if economic conditions did not significantly improve in the near term. Unfortunately, the prospects of any additional stimulus for small businesses are still unknown.
The unknown outlook for both fiscal stimulus, and a presidential election, have created a macroeconomic climate shrouded in uncertainty. The political climate now carries as big an impact as the general economy does, when it comes to affecting SMBs’ decision to expand or not.
The Uncertainty Index has increased 16 points since April and now nears all-time highs. Historically, uncertainty gets suppressed near the end of recessions, as SMBs become aware of the poor macro environment surrounding them. However, between the present surge in COVID-19 cases and the unpredictable nature of the upcoming election and stimulus, SMBs are currently facing significant uncertainties as to how their recovery plays out going into 2021.
As of October, the general level of optimism is back to pre-COVID levels. But, this should not declare the economic consequences of the pandemic as a thing of the past. In the survey, 72% of the SMBs reported that they did not anticipate business activity returning to normal until sometime in 2021 or 2022. While recovery in the optimism index is certainly good news, the level of uncertainty combined with the unwillingness to commit to expanding tells a more pessimistic story. Until uncertainties around stimulus, COVID-19, and the election resolve, a general consensus that life is not back to normal persists for SMBs.
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