US small business confidence declines, but pricing power strengthens

Small business confidence in the US soured a bit last month, the results of a closely-followed survey revealed, although pricing power continued to strengthen, a possible indication of the price pressures that might lie ahead.

The National Federation of Independent Business's index of small business activity declined from a reading of 104.0 for October to 101.4 in November.

Economists had forecast a reading of 102.5.

According to Ian Shepherdson at Pantheon Macroeconomics, the decline was the result of US president-elect Joe Biden's election win and the surge in Covid-19 cases.

The biggest drag on the index came from the slide in the sub-index linked to expectations, which fell by 19 points and Shepherdson pointed to historical precedent to argue that a further drop was likely.

Nevertheless, firms hiring plans bounced back by three points, partly reversing a five point drop during the prior month.

A sub-index for firms' intentions for capital outlays meanwhile dipped by one point.

"Most of the initial Covid hit to capex has been reversed, but we have to brace for a further softening over the next couple months, until the third wave peaks," he said.

The economist also noted the rise in the sub-index linked to selling prices, which rose to its highest level since May 2019.

"[...] We reckon the surge in NFIB selling prices is now consistent with core CPI inflation rising to about 2-3/4%, perhaps by the middle of next year.

"This is a bigger increase than is implied by the base effects in Q2 next year, which are quite large, and it suggests that those businesses which are doing well, despite the pandemic, believe they have some pricing power. The index shows no sign of peaking yet."