Wednesday’s release of homebuilder sentiment from the NAHB showed a significant rebound in sentiment as the headline reading has risen in back-to-back months from the low of 31 in December up to 42 this month. While that is not a screaming endorsement of strength from homebuilders (in the past decade, the only times the index was this low was the past few months and the start of the pandemic), it does mark an improvement in sentiment that is consistent with the recent turnaround in mortgage rates and the rise in weekly mortgage applications.

While sentiment has risen in back-to-back months, the moves from January to February were historic across the report.  The only index to not experience a monthly move that ranks in the top decile of all periods was the Midwest.  Future Sales was the most impressive with its 11-point jump tied with November 1988 for the second largest month-over-month increase on record.

As for the headline index, the 7-point increase was the largest increase since the months of May, June and July 2020 when sentiment began to recover from the pandemic plummet. Prior to 2020, June 2013 was the last time sentiment has risen by as much. Click here to learn more about Bespoke’s premium stock market research service.

As we noted in an earlier post, this morning’s release of the NFIB Small Business Survey showed fewer and fewer respondents observing price increases. Similarly, while still high, fewer respondents to the survey are reporting inflation as their biggest problem.  While the issue remains historically elevated and the predominant issue for small businesses, the percentage of respondents reporting inflation as their biggest issue fell to 26% in January. That compared to a peak of 37% last summer.  As shown below, this reading still has a long way to fall to get back to pre-COVID norms, but at least it’s trending in the right direction.

In the table below, we break down the percentage of small business respondents that reported various issues as their most pressing this month.  As mentioned above, inflation remains the single most commonly reported issue and that reading is also the most elevated with regards to its historical range.  However, the six point decline month over month ranks in the bottom 1% of all month over month moves.  At the same time, fewer respondents reported costs of insurance to be an issue.  Government requirements and red tape also pulled back, albeit that was offset with a 4 percentage point jump (a 95 percentile month over month move) in the share reporting taxes as their biggest issue.  When it comes to “poor sales,” only 4% of small businesses listed this as their number one problem — the same level it was at last month and in the bottom percentile of all readings in the survey’s history.  When it comes to recessionary indicators, we would expect small businesses to list “poor sales” as their number one problem when things really start to slow down, and that simply hasn’t happened yet. Click here to learn more about Bespoke’s premium stock market research service.

This morning’s release of the NFIB‘s survey of small business sentiment showed only a modest rebound. Whereas the index was expected to rise from 89.8 up to 91, the index only rose to 90.3.  Albeit higher sequentially and off the lows from last fall, the January reading also remains below the worst levels from the onset of COVID.

In addition to optimism remaining weak, the most recent month also saw a surge in economic policy uncertainty.  Rising 5 points month over month to 76, that index is at the highest level since July 2021 and saw its biggest one month jump since last July.

Looking across the individual components of the report, breadth was mixed with six of the ten inputs into the headline optimism number moving higher while the other four fell.  Multiple categories—in addition to the headline index—are in the bottom decile of their historical ranges.  As we discussed in today’s Morning Lineup, while in aggregate some aspects of the report remain weak, there is some nuance. In general, this month’s report saw improvement in categories measuring realized changes (i.e. actual earnings changes, actual sales changes, actual employment changes, etc.) while expectations were much worse (i.e. plans to make capital outlays, plans to increase inventories, etc.). In other words, small businesses appear to have pessimistic outlooks contrary to reporting actual improvements in their businesses.

The employment situation showcases that divergence between actual changes and plans. Hiring plans remain at the low end of the pandemic range even after a slight rebound versus the December reading. Meanwhile, compensation plans have plummeted to a new low and the weakest level since April 2021. That was in spite of actual employment changes showing net hirings at the highest level since March 2020 with a coincident uptick in compensation to the highest level in six months.

Albeit on net more firms are seeing declines rather than increases, this month also saw an improvement in actual sales and earnings. Part of that change is likely thanks to alleviation in inflation as the higher prices index hit a new post-high low of 42. In turn, the percentage of respondents reporting now as a good time to expand has modestly recovered.  With that said, sales expectations continued to reverse lower after peaking two months ago.

As for expenditure indices, again the dichotomy of plans and actual changes is apparent.  While plans experienced a 13th percentile month over month decline to the low end of its pandemic range, reported capital expenditures have surged with a top decile month over month reading. In fact, that sharp rise during the month of January resulted in the joint highest reading of the post pandemic period (March and May 2021 saw identical readings).

Meanwhile, plans to increase inventories are rapidly declining.  The index for inventory accumulation has now reached the lowest level since 2009.  However, even though inventories are rapidly declining, businesses on net report satisfaction with current inventory levels. Following the very high readings in inventory satisfaction earlier in the pandemic (meaning on net a higher percentage of respondents reported inventories were too low), the huge drop in inventory accumulation would indicate some supply/demand mismatches are working themselves out; likely in part thanks to weakening sales.

Turning back to capital expenditures, the NFIB also surveys on what these small businesses are spending their money on.  January saw a broad uptick across categories with the exception of furniture or fixtures.    Click here to learn more about Bespoke’s premium stock market research service.

The monthly survey of consumer expectations from the New York Federal Reserve was released this morning and showed that ahead of January’s CPI report on Tuesday, consumer expectations towards inflation are generally stable and trending lower. On a one-year basis, inflation expectations dropped ever so marginally falling from 4.99% down to 4.95%.  Three-year inflation expectations dropped from 2.99% down to 2.71%, and the only increase was in five-year expectations which increased from 2.4% to 2.5%.

Regarding expectations for the next five years, it’s hard to read too much into the trend since the NY Fed has only been surveying consumers on this time frame for a year.  For the one and three-year time frames, however, we have close to 10 years worth of monthly responses so we can get a better read on how things stand now versus the past. Starting with expectations for the next year, consumers expect inflation to continue to trend lower from the peak of 6.78% last June, and at the current level of 4.95%, they’re at the lowest level since July 2021 even as they remain well above the historical average of 3.34%.

Inflation expectations for the next three years are more interesting. While expectations peaked at 4.21% in October 2021, January’s reading came in at 2.71%, which was the lowest since October 2020, but more importantly, below the historical average of 2.99%.  In other words, consumers expect less inflation over the next three years than they have across the majority of other times in the last ten years.   See more analysis of economic data with a Bespoke Premium membership.  Click here to sign up for a two-week trial today.