Why the Optimism Index 3-month run of increases ended in June
What is the NFIB Small Business Optimism Index?
Small business accounts for roughly half of the U.S. gross domestic product (or GDP) and jobs. The National Federation of Independent Business (or NFIB) Small Business Optimism Index is a monthly survey conducted by the NFIB.
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The survey focuses on the NFIB members. It gauges small business sentiment by ten key metrics—plans to increase employment, plans to make capital outlays, plans to increase inventories, expectations of economic improvement, expectations of higher real sales, current inventory, current job openings, expected credit conditions, whether now is a good time to expand, and earnings trends.
Highlights from June’s report
After a promising three-month run, the index fell back 1.6 points in June to 95 from the 96.6 index points recorded in May. The reading remained below normalcy which is an index reading of around 100. While job components improved, capital outlays and planned spending faded along with expectations for improving business conditions. Overall, only two index components improved, two were unchanged, and six fell.
The pullback was largely driven by decline in expectations of economic improvement which fell back a very sharp ten points. Declines were also seen in expectations of higher real sales and whether now is a good time to expand. The only two index components that increased in June were labor market indicators—the percent of owners with job openings and the percent planning to create new jobs in the coming months.
Implications for office REITs
Office real estate investment trusts (or REITs) like Boston Properties (BXP), Vornado (VNO), SL 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 rate in eight years is a good sign for further office demand going forward.
While small business optimism declined, the Bloomberg Consumer Comfort Index (or CCI) picked up as Americans became more upbeat about the U.S. economy than at any time in the past six years. Continue reading the next section in this series to learn what caused the increase in consumer comfort in the past week.