Tuesday, 19 of February of 2019

Economics. Explained.  

Small Business Optimism

February 12, 2019

Small business optimism fell 3.2 points in January to 101.2 after having declined 0.4 point in December to 104.4.  But given the return of divided government, the partial government shutdown, and uncertainty about the next round of tariffs, the January level remains robust.  Keep in mind that the August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.  So while confidence has slipped in recent months, it has fallen from a record high level.

NFIB President Juanita Duggan said,  “Business operations are still very strong, but small business owners’ expectations about the future are shaky.  One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”

NFIB Chief Economist added that, “Although January’s index showed some positive developments among current business conditions, the return to divided government in Washington created an inability to agree on basic policy measures.  This produced the longest partial government shutdown in history, elevating the level of uncertainty, which is damaging to economic activity.”

In our opinion the economy is expected to expand at a reasonably robust pace this year.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

After falling 20% late last year the stock market has recovered much of the earlier loss.   Jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  Mortgage rates have fallen in the past couple of months from 4.9% to 4.7%.  And investment spending remains solid.  We expect GDP growth to be 2.7% this year after having risen 3.1% in 2018.  The core inflation should be relatively stable at 2.4% in 2019 after rising 2.2% in 2018.  The Fed will continue to raise short-term interest twice this year but the hikes will not occur until after midyear.  Moderate GDP growth, low inflation, and low interest rates should continue to bolster the stock market in the months ahead.

Stephen Slifer

NumberNomics

Charleston, SC


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