Small Business Confidence Up to Pre-Recession Levels

In another sign of steady, if modest, improvement in the economy, the National Federation of Independent Business announced that their small business optimism index increased by 1.5 points to 94.1 last month. Though this is still way below trend levels, it’s the highest level the index has seen since December 2007, the official beginning of the recession.

Hitting pre-recession levels is the most important story here, since it highlights the more or less steady increase in optimism over the past two quarters. This comes hand in hand with steady increases in demand indicators over the same period (or longer), which I commented on last week. Optimism is increasing because businesses (though not always small ones) have noticed upticks in consumer activity, higher profits, lower inventories and the willingness of other business owners to stop cutting prices.

– Despite the increase in optimism, NFIB’s report noted that small business may not have benefited as much from increased consumer activity as their larger competitors. Small business owners (SBOs) reported a fall in employment, even though the economy has been creating jobs on net, and a fall in net sales (that is, more SBOs reported falling sales than rising) even though sales have improved economy-wide as well. Is it possible that big business is driving the nascent recovery?

– The big story for progressives over the past year is that SBOs reported their #1 biggest problem was low sales – this trend continues in the most recent report. Weak sales, of course, could suggest a weakness in demand, which would buttress the Keynesian view on our lethargic recovery and would lay the intellectual groundwork for more efforts to stimulate the economy.

A deeper look at the issue takes a lot of wind out of that argument’s sails. Tyler Cowen addressed it months ago, noting that the same data could be used to justify non-Keynesian explanations of the weak recovery (i.e., that the economy is ongoing major structural changes that will depress sales and employment). Russ Roberts pointed out that, back in September, putting together the “taxes” and “government regulation” measures made those the biggest problem reported by small business, not sales. That trend holds today.

Overall, this was a decently good report. We needn’t focus so much on the size of last month’s increase, which was certainly modest, but the nearly unbroken trend in improvement we’ve seen for months. We’ve been on the right track for a while now, and this is just another indication that will continue into 2011.