US NFIB’s small business optimism index falls in January on declined economy and sales expectations

The US NFIB's small business optimism index for January dropped 1.3 points to 93.9, the weakest in nearly two years. Out of the total ten subcomponents, six declined, three rebounded and one remained the same. Expectations regarding a rebound in the economy and higher real sales were mainly responsible for the pullback in confidence that dropped by 6 points and 4 points respectively. Meanwhile, the labor market indicators continued to be strong, with companies increasing employment and worker compensation in January.

In 2015, the small business confidence lost steam, with the trend of declining optimism continuing into 2016. Mainly, decline in expectations regarding the economy and sales have weighed on the confidence. Small businesses are mainly geared toward domestic demand; however, their merchandise exports accounts for around one-third of the total. This indicates that small businesses are not totally protected from the strong US dollar, market volatility and weak global growth.

Meanwhile, in spite of the weak economic expectations, firms are citing strong labor market conditions and are hiring. Furthermore, they seem to have more trouble in looking for skilled workers, urging them to increase compensation in order to attract the desired skill sets. This will assist in supporting income growth, and also lower gasoline prices increase consumption. This will also help bring inflation closer to the central bank's target rate in the medium-term.