Stansberry Research

Small Business Optimism Slides to Six-Month Low

Stansberry NewsWire

Small business owners are preparing for a recession...

According to the National Federation of Independent Business' ("NFIB") Small Business Optimism Index, owners are expecting a downturn in economic conditions this year.

The NFIB's Small Business Economic Trends Survey for December showed that the Optimism Index fell 2.1 points to 89.8 last month – the lowest since June.

The reading now marks a full calendar year in which the index was below its long-running (49-year) average of 98...

NFIB Chief Economist Bill Dunkelberg said that small business owners are not optimistic about 2023 as sales and business conditions continue to deteriorate. He also said that persistent inflation combined with greater economic uncertainty is making it harder for owners to maintain existing operations, with many making major business changes to compensate.

The Optimism Index is made up of 10 survey indicators.

Half of the indicators ask about immediate business plans and operations, or hard indicators.

The other half ask about outlook and expectations over the next year, or soft indicators.

Take a look at the following chart that shows the two indicators...

As you can see, while the hard indicators are showing a sizable deterioration in current conditions, the soft indicators paint a bleak picture for the rest of the year.

In fact, in the entire history of the survey, small business owners now have arguably the most pessimistic view of economic conditions, even surpassing that of the great financial crisis in 2008.

The outlook clearly shows small businesses are expecting a recession this year – and, understandably, a lot of this is affecting their profit margins.

According to the survey, reports of positive profit trends were at a net negative of 30%, down 8 points from November. Excluding the beginning of the pandemic in 2020, this is the largest negative reporting of earnings trends for small businesses since 2008...

Now any debate about the severity of a recession is going to be moot because economic conditions are already bad enough right now. The point of the matter is that the backbone of the economy is telling us margins and earnings are shrinking and economic growth in 2023 will be muted at best.

As we approach earnings season for companies in the S&P 500 Index, investors and money managers will be revising their earnings expectations for the year.

This is an important factor to watch as we get closer to the next Federal Reserve rate-policy meeting. The faster the economy slows down and the more recessionary signals that appear, the more likely the Fed will be to ease rate hikes and ultimately bring them to a peak terminal target rate faster.

This in turn would start a rally in bond markets as money managers and investors look to lock in higher yields as soon as the Fed hints at an end to its rate-tightening cycle.