The NFIB’s small business optimism index rose 0.4 points to 89.9 in July. This was better than the consensus forecast, which expected the index to drop modestly from June’s level. Pulling back the lens, the index is down 9 points from the end of last year and is still at one of the lowest levels in the survey’s nearly 50-year history.
Beneath the headline, four of the ten subcomponents rose on the month and six declined. The share of firms expecting the economy to improve was the biggest mover, rising 9 points from June’s record low level to -52% in July (still one of the lowest readings in the survey’s history). Plans to increase inventories and ‘expected credit conditions’ also improved moderately on the month.
Most of the other sub-indicators declined on the month, with earnings trends (-7 points to -26%) leading the charge.
Labor market indicators were mixed. Job openings eased a touch, falling one point to 49% – not far off from the historical high of 51% recorded recently. On the other hand, coming on the heels of a 7-point decline in the month prior, the share of businesses planning increase employment rose one point to 20%.
With inflation remaining the top concern, labor quality concerns continued to play second fiddle (-2 points to 21%). Workers were still relatively hard to come by (57% reported few or no qualified applicants to their job openings, down three points on the month). The share of firms increasing compensation came in flat at 48%, while those planning to do so fell three points to 25%. Similarly, the share of firms planning to raise average selling prices ahead fell 12 points to 37%.
Key Implications
Optimism among America’s small businesses remains downbeat, with the NFIB index drifting mildly higher on the month but remaining well below historical norms in July. Despite this, labor market metrics suggest that there’s still plenty of appetite among businesses to hire workers. Job openings are not far off from their all-time high, while plans to increase employment are elevated and near pre-pandemic levels. This is in stark contrast to expectations about an improvement in the economy and the belief that now is a good time to expand, which remain near their all-time lows.
With concerns regarding inflation taking center stage over the last few months, hiring challenges, though still a pressing issue, are playing second fiddle. Labor quality concerns remain elevated, but have come off the boil recently, and the share of businesses planning to raise compensation has also eased. Meanwhile, the share of firms planning to raise prices ahead also pulled back noticeably last in July. These are added factors that supports the notion of some easing in inflationary pressures ahead.
