Last year, 2017, was good for the U.S. economy. The stock market added $7 trillion in value, and the economy provided over 2 million new jobs, with an unemployment rate ending at 4.1 percent. This is confusing to those economists and pundits who predicted an economic reversal with Trump’s election win. Central to this economic revival is the small-business sector with about 5.8 million employer firms with fewer than 500 employees, 90 percent with fewer than 20, along with tens of millions of non-employer firms. Small firms responded positively to the election, and their collective actions explain a significant part of the reversal in our economic fortunes.
The National Federation of Independent Business’s Index of Small Business Optimism clearly identified last year’s abrupt change in economic activity. With only 1.2 percent growth in the first quarter of 2017, the economy picked up and produced two quarters of better than 3 percent growth and forecasters are looking for another 3 percent plus growth in the fourth, and in the first quarter of 2018. The 45-year average for the Index is 98, a level only reached twice during the recovery from the Great Recession, 2009- 2016. In October of 2016, the Index was at 94.9, and in the November days preceding the election, it was 95.4. In the remaining days of November, the Index jumped to 102.4, then up to 105.8 in December 2016 and finishing the year at 104.9 in December 2017, with near record readings every month in 2017.
Clearly, the change in the management team in Washington D.C. was critically important to small-business owners. It meant that a new team that ran on a “smaller government” platform would take control. As uncertain as the details of policy changes might have been, the direction was clear, and that mattered. Whatever tax reform or health care reform or regulatory policy might look like in detail, it would be better than the status quo. And the avalanche of new and anticipated regulations over the last eight years would end, returning control of resources back to the private sector and markets. Without a single change in policy, optimism surged after the election according to the NFIB survey data. Small-business owners’ confidence in a better future grew, earnings improved, and hiring increased. Investors don’t commit spending to a dismal future, one that a continuation of the previous administration’s policies would have produced.
Investment in employees and capital expenditures is, for the most part, all about the future. A change in the outlook for economic policy, reducing government’s grip on private sector actions, was sufficient to increase the expected return to growth and investment, and they responded, with millions of firms doing “more”. That added up to substantial growth in jobs and output as is now quite evident. Investment in the capacity of the economy and its workforce has been depressed since the Great Recession. Now it is ramping up with hiring and investment spending coming to life, boosted by more favorable tax rates that raise the return on new investment as well as on the existing capital stock. Although not the only player, small business has clearly played a significant role in the dramatic improvement in economic growth.