Small-business sentiment drifts down even as tax angst hits 35-year low NFIB says

The numbers: The index of small-business optimism from the National Federation of Independent Businesses fell to 104.7 in March.

What happened: The confidence index roared higher early in the year, and despite a decline of nearly three points, remains “among the highest in survey history,” according to the lobby group. The March reading missed expectations of an increase to 107.0, among the economists surveyed by Econoday.

The fewest survey respondents since 1982 said taxes were their number one business problem, NFIB noted.

In March, only two of 10 index components increased.

Index component	Seasonally adjusted level	Change from last month
Plans to increase employment	20%	2
Plans to make capital outlays	26%	-3
Plans to increase inventories	1%	-3
Expect economy to improve	32%	-11
Expect real sales higher	20%	-8
Current inventory	-6%	-3
Current job openings	35%	1
Expected credit conditions	-6%	-3
Now a good time to expand	28%	-4
Earnings trends	-4%	-1

Big picture: The small-business lobby was delighted with the 2017 tax cuts, but concerns about fundamentals may have re-asserted themselves since then. The gauges of sentiment about expected sales and expected business conditions both notched big declines in March, but NFIB pointed out that both “remain at historically high levels.”

Even as small business tax burdens fell, owners report having an increasingly difficult time filling jobs. “Owners complain at record rates of labor quality issues,” NFIB said in a release, “with 89% of those hiring or trying to hire reporting few or no qualified applicants for their open positions.”

Meanwhile, the number of respondents saying they are increasing worker compensation rose to the highest since 2000.

”As we have discussed regularly, the growth signal from surveys in general, and the NFIB survey in particular, appears to have been exaggerated recently by increased partisanship in how respondents answer questions,” wrote Jim O’Sullivan, chief U.S. economist for High Frequency Economics, after the release of NFIB’s February report. “That said, we continue to believe that the surveys are sending the right directional signal.”

The surge in sentiment among small-business owners has coincided with broad gains in the stock market. The Dow Jones Industrial Average DJIA, +1.74% is up more than 30% since the presidential election, despite the recent pullback.

The March NFIB downturn was likely a response to recent market turbulence, suggested Ian Shepherdson, chief economist for Pantheon Macro. “We thought most of the hit from the stock market would appear in the April survey, given the usual lag, but the relationship between the market and the survey is not always stable. In the details, we are disappointed to see a 3-point decline in capex plans, taking the index back to its post-hurricane low. If this persists, we’ll have to moderate our forecasts for business investment spending this year, despite the tax cuts.”

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