Don’t Overlook Small Business Signals

The Macro Institute's Weekly Economic Primer

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The Macro Institute
February 10, 2025

This week’s spotlight is on inflation, with January’s CPI dropping Tuesday, PPI following on Wednesday, and import prices wrapping things up on Friday. We’ll be watching closely, but our attention is also on Tuesday’s NFIB Small Business Optimism Report - a treasure trove of insights beyond just sentiment.

Unlike its labor market data (which is already out and typically precedes payrolls), the NFIB’s Hiring Plans jumped again last month. As the chart shows, this metric is a stellar leading indicator of the unemployment rate. While Friday’s payrolls data underwhelmed, forward-looking signals suggest improvement ahead - a bullish sign for the job market.

The flip side? A stronger labor market could keep inflation pressures simmering through 2025. That means the NFIB report isn’t just about jobs - it’s another key piece in the inflation puzzle. Plenty of big moves to track this week - stay tuned!

The Macro Week Ahead

Jobs Week Recap: Steady, With A Few Bumps:
Last week’s labor data painted a picture of stability with a few surprises. The ISM Manufacturing Employment Index jumped above the critical 50.0 threshold landing at 50.1 (up from 45.0). Meanwhile, JOLTS data showed Quits and Layoff Rates holding steady at 2% and 1% respectively, and the unemployment rate ticked down to 4.0%.

But it wasn’t all rosy - Job Openings slipped to 4.5% (from 4.9% in November), and the BLS revised down its 2024 nonfarm employment estimate by 600,000 jobs. Wall Street watches nonfarm payrolls very closely, however, they are unreliable.
On balance, Bloomberg’s Economic Surprise Index kept climbing, signaling that economic resilience is still the name of the game.


All Eyes On Inflation:
Two weeks ago, the Fed hit pause on its easing cycle citing “somewhat elevated” inflation. That concern got a fresh jolt on Friday when University of Michigan’s 1-year inflation expectations surged to 4.3% - well above the 3.3% consensus. Prices for essentials like eggs, cocoa, coffee, and beef are pushing higher, and ISM’s Manufacturing and Services Prices Paid indices clocked in at 55 and 60 for January, reinforcing inflationary pressures.

Key Inflation Data To Watch This Week:
•    Today: NY Fed’s 1-year inflation expectation (previous: 3.0%)
•    Wednesday: January CPI (expected: +0.3% m/m, 2.9% y/y; Core CPI: 3.1% y/y)
•    Thursday: January PPI (expected to show prices running above Fed’s 2% target)


Cyclical Acceleration In Full Swing:
Momentum is building. January’s ISM Manufacturing New Orders index jumped to 55.1 (from 52.1), a bullish signal ahead of Tuesday’s NFIB Small Business Optimism Index - a key indicator for small-cap earnings. The index has rebounded sharply after hitting a decade-low last year.

With 100 bps of rate cuts fueling an already accelerating economy, capacity utilization is running tight at 77% and expected to climb further. Without excess supply, this expansion could quickly turn inflationary, keeping the Fed on edge. Meanwhile, policymakers are eyeing energy policy and deficit reduction to nudge 10-year bond yields lower.

There are a lot of macro crosscurrents in play - stay tuned for more Macro Monday insights next week!

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