CHART: US small business optimism just logged its largest gain since 1980, and that bodes well for future investment

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Small business optimism in America surged to highs not seen since 2004 in December with the NFIB Index of Small Business Optimism jumping by 7.4 points to 105.8.

It was the largest monthly increase seen since 1980, driven by a huge shift in expectations for sales and the economy going forward.

And, if past relationships are maintained, that surge in sentiment could well be a lead indicator for an equally large boost in business capital expenditure.

The chart below comes courtesy of Morgan Stanley, and shows the relationship to the NFIB index to the bank’s CAPEX plans index.

Source: Morgan Stanley

Clearly there’s a relationship between the two. Where confidence heads, CAPEX intentions tend to follow.

While an optimistic outcome, and one that boded well for US economic growth, it continues the pattern seen since the US election where sentiment indicators — rather than hard data — has been outperforming.

In a note released last week, Barclay’s global equity strategy team suggested that much of the recent improvement seen in US economic data has largely come from surveys measuring sentiment, rather than the real economy.

People think things are improving but it’s yet to be seen in the hard data.

As I wrote at the time, while there’s nothing to suggest that improved sentiment won’t act as a lead indicator for hard data in the period ahead — it has in the past — it demonstrates just how much optimism has been generated by the election of Donald Trump from business.

However, it also underlines that there’s now plenty of room for disappointment should that optimism not be matched by what is delivered in reality.

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