Consumer Confidence Improves as Small Business Optimism Slides

As small businesses closed out the first year of the pandemic, the economic outlook seemed bleak.

"While the economy showed surprising resilience in the second half of 2020, the growth in the fourth quarter was an anemic 1%," according to Hanover Research, which specializes in providing market research and analytics. The firm added that the overall shrinkage of the economy last year was “the worst since the US wound down war spending in 1946.”

However, even with so much uncertainty clouding the U.S. economy, from government relief to vaccine supply chain disruptions, there are some signs of consumer confidence returning with the start of the new year.

Small Business Optimism Declines

In its December report of the Small Business Optimism Index, the NFIB Research Foundation revealed a drop of 5.5 points to 95.9, sinking under the average Index value for the first time in nearly 50 years.

“This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

Other findings in the NFIB’s December report included:

  • A decrease of 24 points to a net negative of 16 percent in small business owners expecting better business conditions over the next six months.
  • A decrease of 4 points to 8 percent in owners thinking it’s a good time to expand.
  • A drop of 14 points to a net negative of 4 percent for sales expectations over the next three months.

While GDP has nearly reached its 2019 levels, there is still a lot of reasons to be concerns as small businesses continue to struggle to keep their doors open, the report states.

Conference Board Confidence Index Shows Moderate Improvement

Still, as bleak as the outlook was in December, it seems that the new year is looking more optimistic with the economy in a better position than anticipated six months ago.

“The U.S. economy moves into 2021 with many of the same challenges it faced in 2020 but new opportunities and challenges will certainly change the landscape going forward and small businesses will continue to adjust accordingly.”  - NFIB Research Foundation Small Business Optimism Index, December 2020

Boosting these feelings of optimism about the future is the Conference Board Consumer Confidence Index, which reported moderate improvement in January, up from the previous month.

“Consumers’ appraisal of present-day conditions weakened further in January, with COVID-19 still the major suppressor,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future. In addition, the percent of consumers who said they intend to purchase a home in the next six months improved, suggesting that the pace of home sales should remain robust in early 2021.”

The Conference Board, a member-driven think tank that provides insights, publishes the Consumer Confidence Survey® to reflect business conditions while forecasting the upcoming months.  

The Importance of Understanding Consumer Confidence

It's clear that the relationship between consumer confidence and the financial health of businesses is connected. When consumers are feeling confident about the economy, there is a propensity to increase their spending.

With this in mind, small business owners may benefit from understanding consumer confidence and what strategies to implement in their planning.

“Getting familiar with the Consumer Confidence Index trends allows organizations to make informed business decisions based on consumer attitudes,” writes Dan Marzullo in the Workest by Zenefits blog. “Well-informed businesses stay in business.”

Marzullo suggests businesses apply the following tactics to help strengthen operations and encourage consumer confidence:

  • Implement strategies to recession-proof your business so that it may withstand tough times. (Note: For additional ideas, read ‘Should You Be Preparing for the Next Recession.’)
  • Create and nurture a solid reputation with customers so even when challenging times tighten budgets, they consider your business essential to them and continue spending.

Whether consumer confidence about the economy returns sooner or later in the year, small businesses must make preparations ahead of time. Start looking at your plans now to determine which strategies work best in building confidence among your customers so that they spend more at your business.