Small business optimism showed a meaningful pullback in November on both an absolute basis and relative to expectations. While economists were forecasting the headline index to come in at a level of 107.0, the actual reading was 2.2 points lower, making it the weakest report relative to expectations since April and the largest m/m decline since March.
After hitting record high levels back in August, the NFIB Small Business Optimism Index has now seen three straight monthly declines, and like a few other indicators, it’s showing signs of rolling over. With that, we’ve heard and read a number of comments suggesting that this decline is another signal that the business cycle may be turning.
In our section on “Economic Cycles” for this year’s 2019 outlook report that was published last Friday, we highlighted a number of economic indicators that have had pretty good records historically at anticipating a turn in the business cycle. One indicator that was not included in that section is the NFIB’s Small Business Optimism Index.
The chart below is the same one as above, but we have also overlaid periods of recession with gray shading. From this perspective, it is pretty obvious that there has been very little correlation to peaks in the Small Business Optimism Index and the onset of recessions. In fact, the two times the index peaked at or around similar levels was actually closer to the beginning of an expansion than the end. This is not to say that this indicator is suggesting strength or weakness in the economy going forward, but instead to simply point out that it hasn’t been the best indicator in terms of predicting the business cycle.
Which indicators should investors be watching for signs of a turn in the business cycle? Sign up today for our 2019 Annual Outlook Special to receive access to our section on “Economic Cycles” and find out!