U.S. small business optimism jumped in December to its highest level in more than eight years, underscoring the economy’s strengthening fundamentals despite slowing global growth.
The National Federation of Independent Business said on Tuesday its Small Business Optimism Index increased 2.3 points to 100.4 last month, the highest reading since October 2006.
The index, which crossed the 100 mark for the first time in eight years, is now back at its prerecession average. It was bolstered by a surge in sales expectations as well as hiring, capital outlays and business expansion plans.
“This is probably why the gross domestic product numbers have been looking better because the small business sector has actually started to contribute to growth,” William Dunkelberg, NFIB chief economist, told Reuters.
The small business sector, which is estimated to account for about half of the country’s overall GDP, added to upbeat employment data in painting a bullish picture of the economy even as dark clouds settle over the global economy.
The economy grew at a 5.0 percent annualized rate in the third quarter, the fastest in 11 years, and is expected to have maintained a solid growth pace in the October-December quarter.
More small business owners view their current inventory of goods as insufficient to meet the anticipated increase in sales, according to the NFIB survey.
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This is consistent with recent government data showing an increase in stocks at wholesalers, which last week led economists to sharply raise their fourth-quarter GDP growth estimates to as high as a 3.7 percent rate.
Even more encouraging, small businesses are raising wages for workers, with a quarter of respondents in December reporting higher compensation — the largest share since January 2008.
That finding is at odds with a surprise drop in average hourly earnings in December’s employment report.
The NFIB compensation measure correlates closely with the government’s quarterly employment cost index, which is widely regarded as a better gauge of wage growth.
About 17 percent of businesses in the NFIB survey plan to raise compensation in the coming months.
“The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation,” said Dunkelberg.
