Morning Equity Briefing
Market Comment
US small business confidence fragile, but likely to improve with easing in bank lending
Rossa White
This week is particularly light for key economic data. A major US government bond auction will probably be the salient event today. But it is worth commenting on a second-line indicator released yesterday: the confidence index for US small business. The NFIB index shows little recovery in confidence (the index is at 88, down from 88.9 last May) since the initial bounce from the floor last spring (from 81 to 88.9). Yet confidence may steadily improve, as the US retail banking sector unfreezes further during 2010.
It has been notable how the ISM — a proxy for the business conditions of medium and large businesses — has diverged from the NFIB index during recovery. Small business optimism has lagged, probably for two main reasons. First, many small businesses related to construction sprang up during the credit bubble. As a chunk of construction capacity evaporated, so too did the medium-term prospects for these related businesses. Second, smaller businesses are more reliant on banks for financing than larger firms which can also tap capital markets. The recent Fed senior loan officer survey showed the first net easing in bank lending standards for almost three years for medium/large firms, but small firms still experienced a slight net tightening in standards.
Importantly though, lending standards for small business are heading in the right direction. The net percentage balance of banks tightening was in single figures as of the last Fed survey, similar to the same juncture in late 2003 or late 1991 when the economy was recovering. Interestingly, the sales outlook of small firms has turned positive in the last two months. In contrast, their expectations for the economy remain low. Recent better results from the regional banking sector suggest that perception may change as bank managers begin to help rather than hinder in the months ahead.