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US: Small Business Confidence Weakens Further in December

  • The NFIB’s small business optimism index declined by 5.5 points to 95.9 in December. The reading came in considerably lower than market expectations, which called for a 100.5 print.
  • Beneath the surface, the declines were broad-based, with nine of the ten subcomponents falling on the month. Expectations for the economy to improve over the next 6 months spearheaded the declines, plunging by 24 points to a net negative 16%. This was followed by expectations for higher real sales (-14 points to -4%) and earnings trends (-7 points to -14%).
  • Similarly, the view that now is a good time to expand and plans to make capital expenditures in the near-future retreated by 4 points apiece to 8% and 22%, respectively. Meanwhile, the share of small businesses viewing current inventory stocks as too low increased by 2 points to an all-time high of 7%.
  • Forward-looking employment indicators were also down on the month. The share of firms planning to increase employment fell 4 points to 17%, while those with plans to increase worker compensation in the near-future pulled back by 6 points to 14%. At the same time, the proportion of small businesses reporting an increase in compensation over the past 3 months retreated by 3 points to 21%.
  • With election results largely out of the way, the uncertainty index eased further to 82 in December – an 8-point decline from the month prior. What is more, future tax increases – alongside quality of labor – were the biggest source of concern for small businesses.

Key Implications

  • Confidence among American small businesses took a serious hit in December. While a contraction was largely expected given a sharp increase in new COVID-19 infections and the reintroduction of restrictions across the U.S. toward the end of last year, the severity of the decline came as a surprise. In fact, the December pull-back was one of the steepest in the index’s history. Of particular note, the deterioration in the survey’s job metrics was also reflected in the broader employment data for the month of December when non-farm payrolls fell by 140k – the first monthly decline since April.
  • Economic and business conditions will likely get worse before they get better. New COVID-19 cases have picked up again in early January, while reports of strained hospitals in several states have multiplied in recent weeks. Other downside risks include new variants of the coronavirus, which appear to spread more easily. The good news is that vaccine distribution, which was slowed by logistical hurdles early on, should accelerate over the coming months.
  • Likewise, fresh fiscal support from Washington should help bolster the economic recovery. The latest coronavirus relief bill notably includes additional funding for the Small Business Administration’s Paycheck Protection Program, set to reopen this week. While job retention remains the program’s foremost priority, this new round comes with added flexibility for small businesses, including a wider array of covered expenses and eligible businesses.
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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