- The NFIB’s Small Business Optimism Index rose 2.4 points to 99.8 in July, soundly beating expectations for a roughly flat reading of 97.5.
- Eight out of the ten index subcomponents improved during the month and two deteriorated. The largest improvement came from the net share of firms planning to increase employment (up 9 points to 20%). The net share of firms planning capital expenditures, reporting now is a good time to expand, and reporting higher earnings this quarter all improved by 4-5 points to 25%, 12%, and -16% respectively. Declines were modest in reports of current inventories being too low and expecting higher future real sales.
- In addition to the uptick in the net share of businesses planning to increase employment, the net share of firms with unfilled job openings rose 4 points to 36%. Quality of labor concerns also spiked in July, with 27% of business owners identifying this as their top business problem.
- The net share of firms currently increasing employee compensation rose 3 points to 31%, while the net share planning to do so over the next three months increased 2 points to 19%. The share of businesses ‘raising’ average selling prices fell 7 points to 31% while the share of those ‘planning’ to raise average selling prices fell 4 points to 28%.
Key Implications
- Small business confidence jumped to its highest level in nearly a year in July, with strength in plans to increase employment and capital expenditures leading to the uptrend. However, given the volatile nature of these subcategories, the sustained elevation in the uncertainty index, and the fact that expectations for the economy to improve remain below their pre-Iran conflict level, it would be wise to view the July report with cautious optimism.
- If the improvement in small business employment plans proves durable, it could be a material benefit for the labor market, as the sector accounts for a little under half of all private payrolls. Additionally, the moderation in the share of firms raising average selling prices could also help ease inflationary pressures in the economy, but this is likely to remain a function of developments in energy prices. Financial markets currently see the odds of a rate hike at the Fed’s September meeting as roughly 50/50, making tomorrow’s July CPI report a key focus.
