Business sentiment index

Categories : Category Insights | Economic Indicators Published on : Jul 27 2017

The business sentiment index is highly correlated with the performance of the US business sector. Generally, if confidence levels surpass an index of 50.0, the economy is considered to be expanding, whereas confidence below 50.0 indicates a contraction. After exceeding a value of 50.0 from 2002 through 2007, the index plummeted in 2008 due to the financial crisis. The September 2008 collapse of Lehman Brothers led to a stock market collapse, detrimentally affecting most of the business sector. The resulting recession caused aggregate corporate profit to tumble, which eroded business confidence. However, as the economy stabilized in mid-2009, business sentiment began growing again.

2010 marked a landmark year for corporate profit performance, growing 25.0% over the year to reach a record high. The tremendous growth in profit led to a similarly large jump in business confidence, which grew 24.2% over the year. The optimism that the economic recovery would be quick was dashed in the following years, though, as lingering unemployment, a struggling housing market and a tight credit market led to little economic growth. As a result, confidence fell moderately in both 2011 and 2012. In addition, the business sentiment index contracted about 7.9% in 2015. The 7.9% decline in 2015 can be attributed to many manufacturing businesses reporting a lower volume of new orders, with some businesses reporting weak demand from global consumers, notably consumers in China and Europe.

According to the May 2017 report from the Institute for Supply Management, 15 of the 18 tracked manufacturing industries have experienced growth in new orders, inventories and employment. These positive trends are expected to lead to a 4.6% rise in the business sentiment index in 2017. In particular, nonmetallic mineral and primary metal production, furniture production, and plastics and rubber products reported the most gains in May 2017. Conversely, apparel, leather and textile industries reported losses in this time.



Forecast

IBISWorld anticipates the business sentiment index will remain moderately volatile and decline over the five years to 2022. However, the index is expected to remain above 50.0, indicating a healthy business environment. Yet, political uncertainty sways confidence levels, which dampens this driver. Moreover, the European economy remains fragile, suggesting sluggish growth in business confidence domestically. Nonetheless, the Federal Reserve’s long-anticipated decision to raise the interest rates at the end of 2016 compounded with it likely implementing further rate hikes later in 2017, has signaled that the US economy is relatively strong. Overall, the business sentiment index is expected to decline to an index value of 52.3 in 2022.


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