March 11, 2025
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Small business optimism declined 2.1 points in February to 100.7 after having declined 2.3 points in January. The media focus seems to be on the fact that the index has declined in each of the past two months. That is true, But the index level also remains above the 40-year average so-called breakeven point for this series which is 98.0. Note also that small business optimism was below that breakeven level for the previous three years and yet the economy performed well.
NFIB Chief Economist William Dunkelberg said, “Uncertainty is high and rising on Main Street and for many reasons. Those small business owners expecting better business conditions in the next six months dropped and the percent viewing the current period as a good time to expand fell, but remains well above where it was in the fall. Inflation remains a major problem, ranked second behind the top problem, labor quality.” Dunkelberg noted that the Uncertainty Index rose four points to 104 which is the second highest recorded reading. While uncertainty is clearly an issue for businesses of all sizes and for consumers, the reality is that small business owners are not yet particularly negative about the performance of the economy in the months ahead.
We saw 2.3% GDP growth in the fourth quarter. We expect to see 1.5% GDP growth in the first quarter and 2.5% GDP growth in 2025. . The economy still seems to be growing at respectable pace despite the policy gyrations coming out of Washington.
The core CPI is expected to be fairly steady at 3.1% by yearend which means that the core personal consumption expenditures deflator should rise about 2.3% in 2025. This is the inflation measure that the Fed targets at 2.0%.
The funds rate currently is 4.6%. The so-called “neutral” funds rate used to be about 2.8% but it now appears to be higher, perhaps around the 3.5% mark. Thus, Fed policy remains slightly restrictive. The Fed may choose to keep policy steady until such time as the core PCE inflation rate falls closer to the 2.0% mark.
With GDP growth continuing at a respectable pace, inflation very gradually slowing, and Fed policy steady, it is not surprising that small business owners have finally become somewhat more optimistic. The promise of elimination of many onerous, confusing, and duplicative regulations should benefit all businesses, but particularly small business owners. However, the wild gyrations in tariffs, the massive federal government layoffs, and the deportation of immigrants is unsettling to all.
Stephen Slifer
NumberNomics
Charleston, SC
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