• The NFIB’s small business optimism index fell by 1.8 points to 98.8 in July, but remained well above the lows seen earlier in the pandemic (March through May). The reading came in below the consensus forecast, which called for a flat print (100.5).
  • Beneath the headline, the picture was mixed. Five of the ten subcomponents fell on the month, four improved and one remained unchanged. Leading the declines were expectations about an improvement in the economy (-14 points to 25%) and higher real sales (-8 points to 5%). Plans to increase inventories (-3 points to 4%) and the belief that now is a good time to expand (-2 points to 11%) also pulled back on the month.
  • The labor market indicators meanwhile, were mostly positive. The share of firms planning to increase employment continued to improve for the third consecutive month, rising by two points to 18%. The supply of labor was also back on the radar, with the share of firms reporting ‘quality of labor’ concerns as their single most important problem ticking up two points to 19%. The share of firms with few or no qualified applicants to their job openings also rose one point to 44%. But, actual job openings retreated slightly on the month, falling two points to 30%.
  • The worker compensation metrics improved only modestly on the month. After sitting at a cyclical trough of 14% during May and June, the share of firms raising compensation ticked up one point to 15%. Meanwhile, the share of firms ‘planning’ to raise worker compensation continued to improve for the third month in a row, rising by one point to 14%.
  • Among the remaining indicators, plans to make capital outlays (+4 points to 26%) and earning trends (+3 points to a net -32%) also improved on the month. Conversely, uncertainty among small business owners ticked up in July, with the NFIB Uncertainty Index increasing seven points to 88.

Key Implications

  • After improving in the two months prior, small business confidence took a small step back in July. The pullback, led by tempered expectations regarding future economic conditions, is consistent with a host of other indicators that point to slowing economic momentum as the surge in new COVID-19 cases in the June-July period caused many states to hit the pause button to their reopening plans. The rise in infections likely also contributed to the increase in uncertainty, which reached its highest level since March.
  • The NFIB July report included a few bright spots, chief among them being the positive tone of the employment subcomponents. The small improvements on plans to increase employment and wages are encouraging, given that they come at a time of increased uncertainty.
  • The downtrend in new COVID cases in recent days is also encouraging. But, with the spread of the virus still elevated, near-term risks appear tilted to the downside. The recent stimulus via executive action, while a net positive for economic activity, bypassed new direct aid to small businesses. With small businesses still on shaky footing, it appears likely that more support will be needed as the battle against COVID-19 and a return to normalcy rages on.


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