For the past three years, small business owners have been struggling with economic and social issues that have limited their ability to grow.  Each month the National Federation of Independent Businesses (NFIB) publishes their NFIB Small Business Index.  For the past 34 months, the index has been well below its 50-year average of 98 as respondents report challenges with labor, costs, inflation, and government policies.  The index has not been this low for as long as it has since the Great Recession. 

However, in November the index jumped 8 points to 101.7 as business owners responded with robust optimism regarding the new administration.  This jump in the index completely surprised analysts who had a consensus projection prior to the election of 94.5.  In addition to the surge in optimism, the Uncertainty Index dropped 12 points to 98 from a record high of 110 reached in October.

November’s reading is the highest reading of optimism since June 2021.  NFIB Chief Economist Bill Dunkelberg made the following observation of this month’s report:

• “The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners….Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record-high uncertainty. Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”

Jeff Burdett, NFIB State Director, noted in the same report,

• “Following the election results, small business owners feel much more hopeful and certain about the future. Anticipating a shift in economic policy that helps lower costs and promotes greater opportunity, Main Street is ready to expand its operations, create more jobs, and meet customers’ demands. That’s good news for Texas’ economy. When state lawmakers head to Austin next month, they should capitalize on this surge in optimism and prioritize pro-growth policies, including inventory tax relief.”

The last time that the NFIB Small Business Index jumped this much in one month was, you guessed it, during Trump’s last November election victory.  Not only did the index surge in 2016 as it did last month, but small business owners remained positive all the way to January 2020 until news of the coronavirus began to develop.  The momentum of the economy kept small business owners optimistic for a few years but in the years following 2020, the index sank to lows not seen since 2008 with the challenges of government restrictions and policies, material and supply shortages, Federal Reserve rate hike policy, inflation, and labor costs. 

Other key points outlined in the NFIB report include:

• The net percentage of owners expecting the economy to improve rose 41 points from October to its highest since June 2020. This component had the greatest impact on the overall increase in the Optimism Index.

• The net percent of owners expecting higher real sales volumes rose 18 points (seasonally adjusted), the highest reading since February 2020.

• Twenty-eight percent (seasonally adjusted) plan capital outlays in the next six months, up six points from October. This is the highest reading since January 2022

• The frequency of reports of positive profit trends was up seven points (seasonally adjusted) from October and the highest reading of this year.

• Twenty percent of owners reported that inflation was their single most important problem in operating their business (higher input and labor costs), down three points from October and surpassing labor quality as the top issue by one point.

In NFIB’s monthly jobs report, 36% of small business owners reported they had jobs they couldn’t fill in November.  Of the 55% of businesses hiring or trying to hire in November, 87% reported few or no qualified applicants for the positions they had available.  Labor quality remains the number one problem for small businesses along with labor costs.

It is remarkable that businesses are still struggling to find competent people to fill job openings.  It seems that one can learn almost anything on the internet.  I was at a restaurant earlier this year and during my conversation with our waiter, I learned he replaced his mother’s Toyota rear axle and braking system the past weekend.  Impressed I asked where he learned his mechanical skills and he responded he didn’t have auto mechanic training.  However, his mother couldn’t afford to get it fixed so he watched YouTube videos getting step-by-step instructions on how to do the replacement. 

In addition to self-learning on the internet, I believe we may see a noticeable increase in trade school enrollment as students of all ages can learn new skills and sometimes be ready for the job market within 12 months.  This is in comparison to the traditional college route that cost hundreds of thousands of dollars with the first two years re-learning what should have been learned in high school.  The worst is that many graduates have no specific training skills to apply for the job market.   

Nonetheless, despite the small business labor issues, small businesses are expanding.  Small business owners have turned positive on the economy and the prospects of their business.  In the report, 54% of owners reported capital outlays to the business in the last six months with 39% reporting spending on new equipment, 22% acquiring new vehicles, and 14% improving or expanding their facility. 

Business owners reported that their inventory was “too low” and plan to increase inventory investment in the next three months.  Small businesses buying to increase inventory could add a short-term boost in 2025 of economic activity.

What Does This Mean to Me?

For the past five years, the S&P 400 (mid-cap) and S&P 600 (small-cap) indices have trailed the S&P 500 (large cap).  The largest companies in the S&P 500 have recovered faster from the pandemic and solidly outpaced their growth over mid and small-sized companies in the respective indices since 2023.

The recent rally in the S&P 400 and S&P 600 didn’t narrow the gap in returns of the S&P 500 and in the past two weeks have declined while the S&P 500 continues to rally.

The tech companies in the NASDAQ have rallied as investors have resumed their aggressive buying of tech stocks.  The NASDAQ index has surged recently and well past the S&P 500 as NASDAQ returns as the top-performing index of the major indices for 2024.

We maintain a favorable view of the US economy and stock market and don’t see any headwinds in the market in the next several quarters.  Should the Federal Reserve lower interest rates tomorrow this would add to the momentum of the economy and stock market.

We appreciate your comments and insights.  Let us know your thoughts on this UPdate and as always, we welcome the opportunity to speak with you specifically about how we may be able to assist you with your financial goals.