There were two important reports on the U.S. economy released this morning. First, the National Federation of Independent Business’s (NFIB’s) small business optimism index ended February at 105.3. That was the first month-over-month decline since September but only a slight pullback that shows owner confidence has not faded significantly following the post-election spike. Under the hood, six of the ten main components that make up the sentiment index deteriorated in February, with the largest declines, albeit still relatively small, seen in surveyed owners’ sales expectations and expansion plans. Focusing on small business labor conditions, hiring increased last month, along with an uptick in the number of job openings. Measures of wage growth, though, softened in February, not surprising since fewer owners complained that there are “few or no” qualified applicants for vacant positions. However, quality of labor remains a growing challenge for many small businesses, and it even surpassed “government regulations and red tape” to become the top reported problem facing surveyed owners, behind only taxes. Ahead of tomorrow’s Federal Open Market Committee (FOMC) announcement on monetary policy, Bill Dunkelberg, NFIB’s chief economist, added that “The Federal Reserve will raise rates another 25 basis points, but this still leaves interest rates historically low. The percent of owners reporting paying higher interest rates on their last loan jumped 7 points to 11 percent in January and held at 9 percent in February, after averaging less than 2 percent since the recovery started in 2009. The interest rate is one of the most important prices in the economy, allocating capital to its highest valued uses. Since 2009, there has been very little movement as Fed policy has paralyzed the functioning of interest rates. The sooner the Federal Reserve restores the role of interest rates, the healthier the economy will become.”
Elsewhere, data from the Bureau of Labor Statistics (BLS) showed that wholesale inflation pressures in America firmed last month, as the producer price index for final demand (PPI-FD) rose by 0.3 percent. That was down from January’s 0.6 percent jump but much larger than the 0.1 percent increase economists had expected. The strong headline print helped lift the year-over-year gain to 2.2 percent, the fastest pace of annual growth since 2014. Although this has been helped by rising energy prices, even core PPI-FD rose by a solid 0.3 percent last month, and the y/y gain lifted from 1.2 percent to 1.5 percent. Altogether this is another report on inflation pressures in American that will make it easier for officials at the Federal Reserve to justify an increase to the federal funds rate at tomorrow’s FOMC meeting. On Wednesday we will also get an update on broader household price pressures with the release of the consumer price index (CPI).
Sources: Econoday, Bloomberg, ZH, Twitter, NFIB, U.S. DoL, FRBSLPost author: Charles Couch