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Small business optimism ticks up again—more hiring ahead?

The National Federation of Independent Business Optimism Survey is a finger on the pulse of small business

The National Federation of Independent Business is a monthly report that contains a wealth of information regarding trends for small businesses. It examines labor markets, plans for capital expenditures, credit availability, inventory and sales data, inflation, earnings, and economic outlook. The survey goes back to 1986, so it’s useful to compare current conditions versus prior peaks and valleys.

Small business accounts for roughly half of U.S. GDP and jobs. While the financial press tends to focus on the large-cap stock market indices as a barometer of the economy, small business tends not to get as much focus. Large capitalization stocks generally have a large international focus, which means their earnings and sentiment don’t necessarily represent the economy as a whole. When forecasting the Fed’s next move, it pays to focus on small business earnings as much as or more than the earnings of, say, Apple.

The Optimism Index dips slightly from its 12-month high, but internals are turning around

The Optimism Index ticked up to 94.1 from 93.9 the previous month. “Normalcy” is an index reading of around 100, so we’re well below the trend. The employment index increased 4 points in January, while the expectations of earnings trends ticked down 5 points. Expectations about the economy were unchanged. Small businesses increased payroll by 0.12 workers on average—lower than last month, which was the highest since 2006.

More firms are reporting sales declines rather than sales increases. Of all small business owners, 14% cited poor sales as their greatest problem. Regulation and red tape came in second, with 22% of all respondents citing them as their biggest concern. First place went to taxes, which were cited by 24% of the surveyed firms as their biggest concern. The lowest concern? Credit availability, although half the respondents said they weren’t interested in borrowing. This dovetails with the low capital expenditures level, where only 24% of all respondents intend to make capital outlays in the next three to six months. This is a recessionary reading, but it has been par for the course since the recession began.

While optimism is holding in there, the drop in sales is particularly worrisome and signals a potential slowdown.

Implications for office REITs

Office REITs like Boston Properties (BXP), Vornado (VNO), S.L. Green (SLG), Kilroy (KRC), and Brookfield Office Properties (BPO) will rely on small business formation and expansion to lower vacancy rates, which are still elevated for this part of the recovery. The fact that small business is hiring at the fastest pace in eight years is a good sign for further office demand going forward.

To learn more about office REITs, see The Fed’s economic growth forecast is good news for office REITs.

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