Latest statistics show rising economic optimism in US

Recent survey data from both small business owners and consumers indicate that Americans entered the New Year with a surge of optimism and confidence about their economic prospects in 2017. According to the latest data compiled and reported by the National Federation of Independent Business, the Index of Small Business Optimism skyrocketed in December. The Index value for the latest month was 105.8 (seasonally adjusted to 1986 =100) which was an unprecedented gain of 7.4 points from the November reading. This surge pushed the Index to its highest monthly reading since 2004.

Most of the time I do not put a lot of stock in the month-to-month changes in this type of indicator because the idea of asking people for their opinions about the present and future economic conditions is a little fuzzy for me. This does not mean that peoples' expectations do not play crucial roles in the decision-making process for buyers and sellers in the marketplace. They most certainly do. Confidence and optimism about the future make up the foundation upon which all investment decisions are based.

But trying to measure the changes in market sentiment every month with an index that is based on a survey is not an exact science. People can change their minds quickly, and often their actions do not match the intentions they stated on the surveys. These types of surveys represent the most natural and basic forms of market research that I can imagine, but they are at times misleading. I am grateful for the effort that the members put in every month to answer these questions, but most of the time the month-to-month changes are rather mundane, or even unreliable. I tend to pay more attention to the trend in the data over a period of time.

This predilection notwithstanding, the recent spike in small business confidence is worth a closer look. The latest jump in the NFIB Index is the largest one-month change — up or down — that I have ever seen. It is also a sharp reversal of the downwardly drifting, two-year trend that had prevailed in this index since the end of 2014. The jump was mostly due to outsized gains in the components that measure respondents' expectations about an improved economy and an increase in sales. There was also a substantial increase in the number of respondents who believe that now is a good time to expand.

The NFIB Index is based on a survey of people that have a lot in common with many readers of Plastics News — owners and managers of small businesses. In my experience, most of these people tend to favor ideas and policies that are traditionally espoused by the Republican party. So a jump in optimism after an election that was dominated by the Republicans is understandable. But I do not believe that tells the whole story.

That's because the recent spike in business optimism was matched by a sharp rise in the monthly indicators that measure consumers' optimism, most notably the Consumer Sentiment Index from the University of Michigan. The latest value for this Index was 98.2 which was an increase of 4.4 points over the previous month. This Index jumped an astonishing 11 points in the last two months of 2016, and the December value was the second-highest reading since January 2004.

Consumers tend to lean less towards Republicans than do small business owners, so the rise in the Consumer Sentiment Index tells me that the wave of post-election optimism was widespread. Nevertheless, that does not totally capture what is going on right now in the U.S. economy. The election results were a surprise, but the underlying economic fundamentals did not change very much in just one month.

I have thought for a long time that these sentiment indicators were expressing expectations about our future prospects that were unduly pessimistic given the fact that we have been in a solid period of economic recovery for seven years. The unemployment rate was low and so were energy prices and interest rates. From my perspective, things were actually pretty good.

But the election of Donald Trump in November combined with the sudden and substantial jump in the sentiment indicators in December suggest to me that this nation is finally experiencing a release of pent-up desire. The British economist John Maynard Keynes called this desire “animal spirits,” and I have heard a number of analysts use this term in recent weeks to describe the current state of the economy.

Now I am certainly not a traditional Keynesian, but I do have a great appreciation and respect for this country's innate desire to be industrious. It has taken a long time to get clear of the fears and anxieties that resulted from the Great Recession, and to be honest, I have wondered many times during the past few years why it was not happening before now. It seemed to me that we were on the verge of hitting another gear for quite a while.

Clearly, we needed a spark. If it turns out that the recent election provided that spark, then we all have good reason to be optimistic about our economic prospects in the coming year. We are now more than seven years into the current economic expansion, and it just now looks like small business owners and consumers are finally starting to get excited.