Economic Report: Small-business confidence ticks up as lower taxes take shape

Sentiment among small-business owners rose in October as the promise of tax reform buoyed expectations for sales and growth.

The optimism tracker from the National Federation of Independent Business rose to 103.8 from 103, the industry group said Tuesday. Economists had predicted a reading of 105, according to the Econoday consensus.

In October, four of the index’s sub-gauges rose, five declined, and one was unchanged.

Index component Seasonally adjusted level Change from last month
Plans to increase employment 18% -1
Plans to make capital outlays 27% 0
Plans to increase inventories 4% -3
Expect economy to improve 32% 1
Expect real sales higher 21% 6
Current inventory -5% -2
Current job openings 35% 5
Expected credit conditions -5% -1
Now a good time to expand 23% 6
Earnings trends -14% -3

The index surged after the election on hopes of less regulation and lower taxes, as well as a rollback of the Affordable Care Act. Washington’s inability to deliver most of those initiatives nudged the index mostly lower over the summer, although there were some months in which stronger optimism shone through.

In August, for example, the index component that tracks plans to spend on capital equipment jumped to its highest since 2005. Such a strong reading “looks high enough to be consistent with a 5%-plus pace” for real gross domestic product, wrote High Frequency Economics’ Jim O’Sullivan after the data was released.

Read: With hurricane noise beginning to soften, economic focus turns to Fedspeak

It was also a strong enough reading for the Federal Reserve to make note of it in its September monetary policy meeting, a step Pantheon Macro chief economist Ian Shepherdson called “remarkable,” noting that the Fed rarely cites private information sources, “presumably because they don’t want to give the Fed stamp of approval to unofficial data.”

This month, NFIB struck a cautiously optimistic tone. “Congress has taken its first cut at tax reform and small business owners are eagerly waiting to see how the developing legislation will benefit them,” the group wrote in its October release.

But it still found time to take a dig at Washington.

“Historically, Congress has given inadequate consideration of the impact of their laws on small firms, paying more attention to lobbies from the largest firms and unwittingly saddling small firms with costly and inappropriate (of little or no value to society) regulations promulgated for large firms.”

Apart from the politics, economic demand underpinning most small business remains sturdy. In October, the single biggest problem for owners, just one percentage point behind taxes, was “quality of labor.” That was the highest such reading since 2000, NFIB said. Some 59% of owners reported hiring or trying to hire in October, and of those, 52% reported few or no qualified workers.

“Owners became much more positive about the economic environment last month, which suggests a longer-run view,” NFIB wrote in a release. “In the nearer term, they are more optimistic about real sales growth and improved business conditions through the end of the year.”

Read: Here are the winners and losers of the Senate tax plan

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