Key Points From Last Week

  • Inflation data was mixed. Consumer Price Index (CPI) data was largely in line with expectations, but Producer Price Index (PPI) data was a bit hotter than expected. We are still seeing steady progress on some of the stickier CPI components like shelter and services. We will also need the other components, such as energy and goods, to remain cooperative for CPI to stay in the 2%–3% range.
  • The NFIB Small Business Optimism Index showed that small business sentiment improved markedly in November. With the resolution of election-related uncertainty, expectations are now rising for future sales, business conditions, and hiring.
  • Treasury yields rose for the week, sending the 10-year U.S. Treasury yield to 4.4%, back near the top of its post-election range. While rate volatility continues, credit spreads remain impressively tight.
  • Equity market leadership appears to be rotating back toward the tech giants known as the “Magnificent 7.” Small-cap and value stocks took a step back during the week, but strength from names like Tesla, Alphabet, and Apple kept the S&P 500 index roughly flat.

What’s on Our Minds This Week

Small Businesses See Big Things Ahead

Despite the unrelenting loom of trillion-dollar tech giants that soak up the attention of economists and investors alike, the humble small business still plays a very important role in our economic ecosystem. According to the Bureau of Labor Statistics (BLS), there are roughly 12,000 companies with more than 1,000 employees, but there are 4.2 million with fewer than 10. Over one-third of the country’s private sector jobs are at companies with fewer than 100 employees. Small businesses employ an outsized proportion of our workforce and have historically been a key driver of new job creation.

The National Federation of Independent Business (NFIB) surveys small business owners across the country to try and gauge their financial condition and future outlook. Thanks to some combination of inflation, interest rates, and ever-increasing competition from big business, that outlook has been poor for several years. The NFIB Small Business Optimism Index had spent 34 months well below its 50-year average of 98. Then, in November, it jumped ahead to its highest reading since June 2021. Small business owners are now seeing better business conditions and higher revenues on the horizon—and are responding by beginning to ramp up plans for hiring and capital expenditures. A partial explanation for the sudden shift is surely the removal of election-related uncertainty. The NFIB was receiving survey responses of “I don’t know” or “uncertain” at its highest rate on record in the lead-up to the 2024 presidential election. Now, some small business owners appear to be buying into President-elect Donald Trump’s promises of strong growth and deregulation. Others are just relieved to be past the uncertainty. Of course, tariff policy remains a key wild card, as does immigration policy (particularly for industries that rely on immigrants for labor, like hospitality and agriculture). But for now, improving optimism from small businesses can go a long way in terms of stabilizing labor markets and driving the economic expansion forward.

Keeping an Eye on the CPI

Last week’s CPI data was mostly in line with expectations. Headline inflation rose 0.3% in November and 2.7% over the past year. These levels of inflation are above the Federal Reserve’s stated target but are still in line with normal historical ranges. This month, we saw improvements from some of the stickier components like shelter and other services. Shelter inflation was up a modest 0.3% for the month, which brings the year-over-year number down a notch to 4.8%. This trend should continue slowly as the BLS metric catches down to more current measures of rent growth, which appear to have bottomed out below 4%.

Outside of shelter, other services are also showing signs of progress, ticking down to 4.1%. Services inflation tends to be more heavily influenced by wages, which are still growing at roughly 4% per year, even as the labor market softens modestly. When considering the consistent strength of consumer spending, it feels likely that services inflation will continue to be somewhat sticky around the 4% level. This means that other pockets of recent weakness will need to remain weak to continue to offset strength on the services side. This includes energy as well as durable and nondurable goods. Goods do not make up a big portion of the CPI basket, but they are still important because they have been serving as a reliable offset to the heat being seen in shelter and services inflation. We believe this makes tariffs an important variable as we head into 2025.

Sources: Bureau of Labor Statistics and the National Federation of Independent Business. Past performance does not guarantee future results.

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