Use the Optimism Index to Make Better Business Decisions

When you’re an employee, it’s easy to find out how co-workers see things. Just ask them. It’s validating to learn you’re not the only one seeing things a certain way. It can also open your eyes to things you may not have considered. But when you’ve got your own shop, it’s harder to take the pulse of other business owners. That’s where the National Federation of Independent Business (NFIB) can help with their monthly Small Business Optimism Index (SBOI). It’s a way to gauge what issues are important to the success of small businesses and to the economy at large.

What Is the SBOI?

The NFIB, a member-driven organization advocating for small and independent business owners, publishes the Optimism Index on the second Tuesday of each month. It’s based on a survey of how their members view ten components that impact small businesses. 

Specifically, NFIB members are asked for their views on: plans to increase employment, plans to make capital outlays, plans to increase inventory, expectations on the economy, real estate expectations, current inventory, current job openings, expected credit conditions, expansion status, and earnings trends.

Results are reported on the NFIB website along with analysis and commentary.

How Can It Help You?

The SBOI can serve as a reality check on the small business environment and the economy. For example, the employment component tells you whether small businesses, as a whole, are hiring or laying off workers. Compare that to your own local economy to see if you’re part of a bigger trend. Knowing larger forces are at play may steer you to make different business decisions. 

The current job openings component can be an indication of the slack in the labor market. That may signal where other small business owners are experiencing difficulty in hiring. Likewise, the percentage of owners who plan to raise average selling prices can provide insights into inflationary conditions.

It can also help identify (or confirm) new opportunities. For example, the May 2019 index reported that capital spending was up 6 points, the highest since February 2018. Small businesses in the survey were confident enough in the economy to spend capital dollars. If you have been considering buying new equipment, for example, this may help confirm your decision. Or it may be one factor in considering such an expenditure.

Caution On Its Use

Every business is different and decisions should be based on your own, unique situation. But the SBOI can keep you informed of trends that other business owners are experiencing. It’s up to you to interpret how they apply to your business.

Moody’s Analytics offer these insights on the index to help you assess its value:

  • Strengths – The index provides a timely measure of business confidence, hiring, and capital expenditure plans. You’ll also get helpful anecdotes on the health of small businesses. The index has a relatively long history so you can look at trends over a wider timeframe
  • Weaknesses – The index reflects current economic conditions. They are not necessarily leading indicators of future performance. In addition, NFIB’s membership is not representative of the entire economy. The construction and retail sectors make up 45 percent of the survey respondents

The Optimism Index is one way small business owners can learn what other entrepreneurs are thinking. That can provide valuable information to confirm your own experience or to take another look at a trend you haven’t considered. Knowing what’s happening can help you make more informed decisions for your small business.

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