Yikes! Small Business Optimism Back to 2008 Recession Levels

Tue, Apr 12, 2016 - 4:31pm

The outlook by small businesses continues to deteriorate. When looking at the charts, it does appear that recession risks are on the rise.

Consider Small Business Optimism Drops to a New Two Year Low

For a broader perspective, the [Small Business Optimism] Index has turned decidedly “south” over the last 15 months falling from a reading of 100 in December 2014 to 92.8. A “chartist” looking at the data historically might conclude that the Index has clearly hit a top and is flashing a recession signal…

The small business sector…is doing little more than operating in maintenance mode… there is no exuberance, no optimism and not much hope, the numbers make it clear. Owners have been able to borrow at low rates for nearly a decade but most have no interest in borrowing because government policies have stifled economic growth and the potential for investment in real capital to yield a decent return.

Here’s a look at the overall index. As you can see, small business optimism is now back to 2008-2009 recessionary levels.

We continue to see a divergence between small businesses and consumer confidence. Small businesses are much more sensitive to cyclical changes in the underlying economy whereas consumers tend to remain confident right up until a recession is knocking on the door.

The current divergence suggests that either small businesses are too pessimistic or consumer confidence is misplaced. Odds favor the latter.

Small business hiring plans also look toppy and may be rolling over.

Here’s an interesting chart that you probably haven’t seen before. US unemployment and the percent of small businesses reporting sales as their most important problem have maintained an extremely tight correlation for the past 16 years. We smoothed the small business data to help show the underlying trend but if higher percentages of small businesses continue to report sales as their main problem, we may be looking at a pickup in unemployment from these levels.

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