Another New High in Small Business Optimism

On Tuesday, the National Federation of Independent Business (NFIB) reported small businesses are showing unprecedented optimism. The NFIB Small Business Optimism Index rose to a new high of 107.6 in February, up 0.7 points over January and above the pre-report consensus of 107.1. It was the second highest reading in the 45-year history of the Index; the highest reading recorded was 108.0 in 1983.

Following the huge increase in the Index in early 2017 after President Trump took office, many forecasters said the increase was likely only temporary and that it could not be sustained. While the Index did pull back modestly last year, as you can see above, it has since recovered to new highs this year.

Almost all of the 10 Index components, including inventory plans and sales expectations, increased or held steady in February. Thanks to tax cuts and deregulation enacted by the Trump administration, businesses cited improved profit trends at the best level since 1987. The NFIB’s President & CEO, Juanita Duggan, added:

“When small business owners have confidence and certainty in the economy, they’re able to hire more workers and invest in their business. The historically high readings indicate that policy changes – lower taxes and fewer regulations – are transformative for small businesses. After years of standing on the sidelines and not benefiting from the so-called recovery, Main Street is on fire again.”

The Number 1 issue troubling companies, though, continued to be finding enough skilled labor, with 34% of respondents reporting job openings they couldn’t fill, led by the construction and manufacturing industries. About 15% said they’re using temporary workers, the highest level since November 2016.

Consumer Price Index Rise Slowed in February

The Labor Department reported Tuesday that consumer prices rose 0.2% in February, in line with pre-report expectations and likely alleviating concerns that inflation is about to accelerate. On a year-over-year basis, the Consumer Price Index (CPI) rose 2.2%, slightly above the 2.1% increase reported in January.

Excluding volatile food and energy prices, the “core” CPI was up 0.2% for the month and 1.8% for the 12 months ended in February, unchanged from a month ago. You may remember that the January CPI showed a higher than expected increase of 0.5%, and this set off a round of concerns that inflation was trending higher, which could mean more Fed rate hikes this year.

The sub-indexes for shelter, apparel, education, personal care, airline fares and energy rose last month, while the food index was unchanged.  New car prices fell 0.5%, the biggest monthly decline since August 2009.

While there is evidence of building inflationary pressures in certain components, the annual growth rates (especially for core CPI) do not suggest a breakout in overall inflation so far this year.

Investors are watching the inflation numbers closely for clues on how often the Federal Reserve will raise interest rates this year. Markets currently agree with Fed projections for three hikes, though a more aggressive inflation move could trigger additional increases. The next Fed policy meeting is next Tuesday and Wednesday when a Fed Funds rate hike is widely expected.

Retail Sales Decline for Third Month in February

US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, pointing to a slowdown in economic growth in the 1Q. It was the first time since April 2012 that retail sales have declined for three straight months.

The Commerce Department reported Wednesday that retail sales slipped 0.1% last month, well below the pre-report consensus for a gain of 0.3%.  January data was revised upward to show sales dipping 0.1 percent instead of falling 0.3 percent as previously reported.

Auto sales fell 0.9% last month, while purchases at gas stations tumbled 1.2%. Sales at department stores declined 0.9%. But spending at online and catalog retailers climbed, as did spending at building materials stores, restaurants and clothiers to offset much of the decline elsewhere.

The bottom line is that despite the modest declines over the last three months, retail sales were up a respectable 4.0% for the 12 months ended February. Assuming sales rebound in the coming months, as most forecasters predict, the US economy could still be on-track to grow by 3% this year.

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