Skip to main content
Economic & Housing Weekly Note

Small Business Optimism Falls by the Largest Amount Since April

December 11, 2020

Key Takeaways:

  • Initial claims for unemployment insurance jumped by 137,000, the largest increase since the end of March, to 853,000 in the week ending with December 5, according to the Department of Labor. The four-week moving average rose by 35,500 to 776,000.
  • The University of Michigan Consumer Sentiment Index grew 4.5 points to 81.4 in the preliminary December reading. Both the current economic conditions and the consumer expectations components increased, though according to the press release the increase was driven by a shift in election-related confidence based on political affiliation. The press release also mentioned that “year-ahead prospects for the economy as well as personal finances remained unchanged.”
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 2.6 points in November, the largest decline since April, to 101.4. The share of firms planning to increase inventories dropped from a record high of 12 percent to 5 percent. The share of firms expecting the economy to improve fell sharply by 19 percentage points to 8 percent, the largest decline in eight years.
  • Consumer (non-mortgage) credit outstanding increased by $7.2 billion in October to $4.2 trillion, according to the Federal Reserve Board. Revolving credit (largely credit cards) fell $5.5 billion, the seventh decline in eight months. Outstanding revolving credit now sits at the lowest level since May 2017. Nonrevolving credit (largely student and auto loans) rose by $12.7 billion.
  • In November, the Consumer Price Index (CPI) rose 1.2 percent from a year ago, the same pace of annual growth seen in the prior month. Core CPI (excludes food and energy prices) grew 1.6 percent from a year ago, also unchanged from the prior month.
  • U.S. household and nonprofit organization net worth—the value of assets minus liabilities—grew $3.8 trillion in the third quarter, according to the Federal Reserve. This increase was driven primarily by a $2.4 trillion increase in the value of corporate equities and mutual fund shares. Owners’ equity in real estate rose solidly once again, and owners’ equity in real estate as a percentage of household real estate value remained essentially unchanged at 65.5 percent, the highest share since Q3 1990. Single-family mortgage debt outstanding rose $164.7 billion to $11.5 trillion (nominal), a record high and the largest increase in 13 years.
Forecast Impact:

The recent increase in initial unemployment insurance claims suggests to us that the resurgence of the virus across the country, along with the subsequent steps taken in some localities to try to slow the spread of the virus, could be leading to a renewal of layoffs and furloughs as some businesses have to cut operating hours or close once again. Colder weather also appears to be dampening the recovery in food service and hospitality sectors as outdoor dining options become less appealing. Alternatively, it may simply reflect an abnormal seasonal pattern around temporary holiday retail and hospitality hiring, clouding the interpretation of the indicator. However, if initial claims do continue to rise, there would likely be further declines in both consumer spending and sentiment. We believe the continued decline in revolving credit, which remains well below the pre-pandemic levels, also suggests a slower pace of consumption in the fourth quarter, and our forecast expectation is for a significantly slower pace of further recovery in the near term. November small business optimism experienced the largest decline since April, highlighting the current extent of economic uncertainty, and could lead to weaker business investment in the fourth quarter. The preliminary December increase in consumer sentiment seems like a welcome sign, though the increase was attributed mostly to partisan shifts in economic expectations due to the election. Despite the increase in sentiment, we believe that this may not actually lead to any change in spending behavior, particularly given that the survey showed no expectation of improvement in personal finances.


Ricky Goyette
Economic and Strategic Research Group
December 11, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.