Business optimism is skyrocketing. Will the economy do the same?
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Last year was unpredictable, capped off by what 73 percent of voters considered a shocking result to the U.S. election. Throughout 2016, the entire world cautiously waited for the results to get a sense of which direction our country is headed. And while the election outcomes have seemingly created more uncertainty for some, CEOs and business owners are signaling a first-of-its kind spike in post-election optimism in the U.S. economy.

According to PwC’s Trendsetter Barometer survey, which measures private company sentiments on the economy, private company optimism was stalled at 38 percent ahead of the election because of uncertainty about the economy’s 12 month prospects. In the weeks following Election Day, however, optimism levels surged to 70 percent, eventually averaging out at 59 percent by the end of the quarter.

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This jump is unprecedented in the survey’s 21-year history, as there has been no significant movement in optimism from the third to fourth quarters in previous presidential election years, with one notable exception — the contested George W. Bush win in 2000, when optimism plummeted. These private company executives see Trump’s win as promising for business, citing tax reform and reduced regulations as the foundation for potential growth.

 

Importantly, however, this spike isn’t unique to the private companies in PwC’s research, as research by the National Federation of Independent Business and the National Center for the Middle Market show similar bounces in optimism in small business and the middle market, respectively.

Small business optimism was flat leading up to Election Day and then soared after Trump’s win, rising just above the 42-year recorded average and only the third time since 2007 that it has broken into above average territory. This can be attributed to small business owners’ expectations that there will be more favorable operating conditions should Trump follow through on his campaign promises to overhaul the Affordable Care Act and decrease taxes and regulations, making them optimistic that those policy changes will improve their businesses.

Similarly, there are optimism spikes in the middle market. In the weeks after the election, confidence in the global, national, and local economies reached the highest levels ever recorded. Business leaders in the middle market are looking forward to a strong 2017 with increases in revenue and hiring.

Many investors see this phenomenon as “Trumpflation,” a boost to both growth and inflation that is expected to last a few years, with little long-term impact on the real economy. But in the 21 years since theour survey launched, the results have demonstrated that private companies are a leading economic indicator of where the U.S. economy is headed, especially when it comes to economic growth, hiring, and wages. In fact, high levels of optimism among private companies is a solid one year leading indicator of U.S. gross domestic product (GDP) growth.

If this higher optimism among private companies can be sustained, it could translate to an increase in business activity, including hiring and expansions in the next few months. For these higher levels of optimism to continue, however, the Trump administration must deliver on campaign promises of tax reform and decreased regulations, two of the driving forces behind this renewed sense of optimism among businesses of all sizes.

It’s also important to note that not all of our economic indicators show such positive trends for the economy. Revenue forecasts are notably lower and economic growth forecasts remained relatively flat at 5.5 percent growth, a modest increase from 5.4 percent in the third quarter, which was the slowest rate we’ve seen since mid-2009.

Skyrocketing economic optimism is a good sign, but we’re going to have to wait and see if this optimism turns into economic growth.

Ken Esch is a tax partner in private company services at PwC, where he leads the firm’s Trendsetter Barometer.


The views expressed by contributors are their own and are not the views of The Hill.