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Business Confidence Collapse Heralds Judgment Day for U.S. Economy

Last Updated September 23, 2020 1:48 PM
Simon Chandler
Last Updated September 23, 2020 1:48 PM
  • U.S. businesses just recorded a historic nosedive in confidence, as recorded by the NFIB’s Optimism Index.
  • Businesses expect a sharp contraction in sales and marked deterioration in the U.S. economy.
  • The slump in business confidence is an early forewarning of just how steep the coronavirus recession is likely to be.

The coronavirus is causing the U.S. economy to break all the wrong records. An unprecedented 6.6 million Americans filed for unemployment insurance last week, and today the economy added another dubious achievement to the list.

Between February and March, the National Federation of Independent Business Small Business Optimism Index plummeted from 104.5 to 96.4 .

This historic decline is a very bad omen for the nation’s economic outlook. Combined with unprecedented unemployment data, it reveals that the core U.S. economy is set to take a massive hit from the coronavirus. And it’s unlikely to recover anytime soon.

Coronavirus Infects Business Optimism

coronavirus long-term impact on u.s. economy
The U.S. economy is set to take a massive hit from the coronavirus. And it’s unlikely to recover anytime soon. | Source: Viacheslav Lopatin/Shutterstock.com

Tuesday’s reading is the largest monthly drop in optimism since NFIB began compiling the index in 1986.

And the record drop ends a 39-month run of strong small business sentiment. In other words, the coronavirus has erased the gradual improvement the U.S. economy had enjoyed over the past three years.

U.S. business optimism index after coronavirus
For U.S. small business sentiment, it’s almost like the last three years didn’t happen. | Source: NFIB 

And make no mistake, the NFIB is blaming the coronavirus for the record plunge in business confidence.

The business impact of Covid-19 has shaken the small business sector. The economic disruptions felt on Main Street escalated over the month as an increasing number of small businesses rapidly scaled back operations or closed their doors altogether.

U.S. businesses expect even worse days ahead. The NFIB writes that they anticipate “continued economic disruptions going forward.”

Nine out of ten components of the optimism index recorded marked falls. There was a 31-point dive in expectations of increased sales. And a 13-point fall for businesses thinking the next three months would be a good time to expand. That made it unsurprising to see a 12-point decline in U.S. businesses expecting to increase employment.

U.S. business confidence components in wake of coronavirus
Business confidence is moving in the wrong direction. | Source: NFIB 

Additionally, there was also a 17-point fall in confidence that the economy will improve. If this pessimism is justified, then U.S. business optimism is likely to accelerate its downwards trajectory as the coronavirus pandemic continues its forward march.

U.S. Economy Could Be Trapped in a Vicious Circle

Small businesses are right to suspect that the U.S. economy will get much worse before it gets better.

For one thing, nearly ten million people filed for unemployment  in the final two weeks of March.

Goldman Sachs predicts that the coronavirus will cause U.S. economic output to fall by 34% in the second quarter . The bank expects the unemployment rate to surge to 15% by the second half of 2020.

The Asian Development Bank is forecasting that the coronavirus pandemic will cost the global economy $4.1 trillion .

Taken together, it’s entirely understandable that U.S. business optimism has experienced its biggest ever monthly fall. All economic indicators are pointing to a sharp recession, or even a lasting depression.

But it’s remarkably telling just how quickly and how sharply these negative indicators have affected business confidence.

And it’s likely that the collapse of U.S. business optimism will help create a self-fulfilling prophecy. Because when businesses expect a sharp contraction, they reduce their output. And when they reduce their output, the U.S. economy contracts. And so on.

That’s why the NFIB’s report is so significant. It forewarns just how bad the coming recession is going to be.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.