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Small Business Owners are Really, Really Optimistic

woman with cleaning supplies

J: Back in 1973, my good friend Bill Dunkelberg was a Professor of Economics at Purdue University and the Associate Director of the Credit Research Center there. He began a relationship with the National Federation of Independent Business (NFIB) in October 1973. Today he is their Chief Economist and an Emeritus Professor of Economics at Temple University after a long and distinguished stint as Dean of the Fox School of Business.

From 1973 through the fourth quarter of 1985, he conducted surveys of NFIB members and used the results to construct the Small Business Optimism Index. The surveys have been conducted monthly beginning in January 1986.

As the chart shows, the index hit a new record of 108.8 (1986=100) in August. The old record of 108.0 was set in July 1983. That accurately predicted the phenomenal economic growth after the recessions of January to July 1980 and July 1981 to November 1982. That recession saw the national unemployment rate peak at 10.8 percent in November and December 1982.

Real GDP growth was 4.6 percent in 1983, a huge 7.2 percent in 1984 (the best since the 8.0 percent of 1951 during the Korean War) and 4.2 percent in 1984. No one expects to see sustained economic growth like those years any time in the foreseeable future, but the idea that growth will stay above 3.0 percent a year for the next two or three years seems more logical now.

Furthermore, as the chart shows, the NFIB index has been at sustained high levels ever since the elections in November 2016. Many components of the index are also at high levels.

The job-openings component also set a new record in August as did the report of labor quality. The "Good Time to Expand" question tied its record high at 34 percent. The percentage of small business owners expecting to add to their inventories tied a record at 10 and capital expenditure plans were the highest since July 2006.

This record for the NFIB index is important because small businesses (over 20 million of them) account for about half of private-sector GDP and provide employment to about half the private workforce. The NFIB releases their index on the second Tuesday of every month, when that's not a holiday.

This index has been a reliable leading indicator of overall economic activity for many years. If that continues, we should expect to see good economic growth for at least the next two years. We'll keep watching this index.

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