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What is Small Business Confidence and What Does It Mean?

From fickle customers to changes in supply lines, and from tax increases to regulatory changes, there’s a lot of risks involved in running a small business. How a company feels about its chances for success or its likelihood of failure is often called business confidence. Small business confidence reflects how small, “mom and pop” companies feel about their future.

In some ways, business confidence reflects the overall economy. When things are looking up, customers are buying, jobs are plentiful, and taxes are low, owners feel some assurance that the future looks bright, which can help to boost the economy even more. But when things are on a downswing, no one’s buying, workers are being laid off, or taxes are too high, confidence tends to drop.

What Indicators Measure Small Business Confidence?

Several surveys measure small business confidence on a regular basis. One such report comes from the National Federation of Independent Businesses (NFIB).

NFIB conducts monthly surveys of its members and has done so since 1986. In January of 2018, the survey asked small business owners how they felt about 10 components. Those components included:

  • Plans to increase employment
  • Plans to increase inventories
  • Plans to make capital overlays
  • Expect real sales higher
  • Expect economy to improve
  • Expected credit conditions
  • Current employment
  • Current inventory
  • Earning trends
  • Now is a good time to expand

If businesses have a positive outlook on the majority of those 10 components or, in very rare cases, on all 10 components, that’s typically a sign that confidence is high.

What Increases Small Business Confidence?

Several factors can influence how optimistic — or confident — small businesses feel. For example, the Tax Cuts and Jobs Act, passed in December 2017, most likely had some impact on the optimism business owners reported in January.

As CNBC reported, nearly half of all businesses surveyed currently expect the change in tax law to have a positive effect on their activities. In simple words, that means they are expecting to pay fewer taxes in 2018 than in years past.

What does paying fewer taxes mean for businesses? Another CNBC survey revealed that more than half of small businesses believed that a lower tax bill would allow them to create more jobs and would help to stimulate economic growth.

What Happens When Small Business Confidence is Up?

Typically, an increase in small business confidence is good news all around, it’s also often related to ‘animal spirits in investing’ which just means the human emotions that drive consumer confidence. To give you a sense of the massive difference between high and low business confidence, let’s first take a look at what happens when business confidence drops.

Travel back in time about a decade to the height of the recession. Things were a mess. Companies were laying off employees; people were staying home and watching their wallets and bank accounts like a hawk. Small businesses who saw a decline in customers weren’t able to pay their debts or obligations and often went bankrupt.

It might be an understatement to say that business confidence was low during the recession. It’s also worth noting that it doesn’t take a recession for business confidence to drop. Business confidence can fall when people feel more inclined to save their money rather than spend it or when a company has to put the brakes on hiring people, even if it doesn’t lay anyone off.

Now let’s focus on the positive. When business confidence is up, it usually means good things for everyone connected with that business.

Take jobs. According to the January 2018 NFIB survey, 20 percent of small businesses planned to increase employment. That means more opportunities for more people, and also that national unemployment rates can drop.

Businesses don’t just make more jobs when confidence is high. They also tend to make those jobs better. That means higher salaries for employees as well as better benefits, such as 401ks for employers, more paid time off, and better healthcare options.

Another benefit of increased business confidence is that smaller businesses are likely to put more effort into growing and expanding. The January 2018 NFIB survey found that 32 percent of small business owners thought that “now is a good time to expand.” The number of businesses looking favorably at expansion jumped by 5 percent from December 2017.

Can There Be Too Much Optimism?

Although a high rate small business confidence is often looked at as a good thing, it’s worth noting that there’s such a thing as too much. Remember that there tend to be cycles in business — what goes up usually comes down.

One thing that can determine how quickly (or not) confidence falls is how high it climbs, to begin with. If business owners get too confident, so that their expectations exceed reality when it comes to growth, jobs and other positive signs of change, they can come crashing back down. When that happens, it’s just a matter of time before the winds of change push confidence back up.