Large insights from small sources

While some may be concerned by the latest survey results from the National Federation of Independent Business (NFIB), the numbers do not indicate dire trends. Yes, the data has been softer than expected across a wide spectrum--including leading indices and weak ISM orders. But in the recently released small business poll, there are a few positive surprises buried in the details that should alleviate some of the anxiety evident within the investment community.

Fortunately, the NFIB optimism index edged higher and is not deteriorating further, as it did during the 2006-2008 time period. Small business optimism has, almost shockingly, improved a tad, defying most perceptions of the challenges facing small firms. While less than 25% of firms are looking to increase capital expenditures, that is still the best number seen in roughly three years. In addition, a fewer net number of companies report planning to cut back on inventory--and small business looks a bit more ready to increase capital spending over the next three-to-six months.

Despite complaints about bank lending and credit constraints, the survey also showed that firms are experiencing less difficulty in getting financing. Small business owners seemed to suggest that financing conditions had eased and were likely to get even easier, possibly reflecting some thawing in credit availability and the typical lag between eased credit conditions and actual lending activity. While many naysayers argue that weak final demand and excess capacity are limiting investment opportunity, the small business community begs to differ, as more businesspeople expect better retail sales in the next six months.

Lastly, companies still plan to add employees and inventory--regardless of recent hesitation. If small business is truly the engine of the economy, it does not seem to be failing now. Thus, barring a credit collapse emanating out of Europe, recession calls seem premature and equity markets look enticing. NOTE: This post is adapted from Citi North America Equity Strategy's "Monday Morning Musings," published on October 14, 2011.