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Small Business Confidence Rises Solidly in the First Quarter

Wednesday, February 24, 2016

From Wells Fargo

Small business owners began the new year on an optimistic note. The Wells Fargo/Gallup Small Business Index rose to a level of 67 in the first quarter, marking the index’s highest reading since last January. Business owners expressed greater confidence about the economic outlook and also reported improved cash flow and better finances in general.

The rise in small business optimism follows three consecutive quarterly drops. The increase suggests that worries about the global economy, which have rattled the financial markets much of this year, are not necessarily carrying over to Main Street.

Small business owners expressed greater optimism about both current and future business prospects. The present situation series rose five points to 26, while the future expectations series rose eight points to 41. The two components rose to their highest levels since last January; however, both series remain slightly below their year-ago levels.

We had noted previously that the earlier run-up in small business optimism was led largely by the explosive growth in the energy sector, which fueled growth at a number of small businesses in energy producing states. The abrupt reversal in oil prices has adversely impacted many small businesses with operations in the energy sector, and likely accounted for a sizable portion of the slide in confidence during 2015.

While the overall index has wavered from quarter to quarter, key components of the survey have shown steady improvement. The proportion of businesses reporting that their current financial situation was either “very good” or “somewhat good” rose two percentage points in the first quarter to 67, which marks the best reading for this measure in eight years. One likely reason so many firms feel better about their finances is that cash flow appears to be improving. Sixty percent of small business owners said that their cash flow over the past 12 months was either “very good” or “somewhat good,” which is the highest reading since late 2007.

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