U.S. small-business confidence soared to its highest point in nearly two and a half years this July, suggesting that concerns of a recession sparked by last month’s uptick in the unemployment rate may have been overstated. The National Federation of Independent Business (NFIB) reported on Tuesday that its Small Business Optimism Index climbed by 2.2 points, reaching 93.7—the highest level since February 2022.
Despite ongoing concerns about inflation (which is a key issue for both owners and CFOs), fewer businesses reported raising worker compensation and average selling prices, offering a positive sign for the inflation outlook. Additionally, more businesses planned to increase inventory in the coming months, which could contribute to a boost in gross domestic product. This report aligns with a survey from the Institute for Supply Management last week, which showed a rebound in its non-manufacturing Services Purchasing Managers' Index (PMI), helping to alleviate fears that the economy is either in recession or nearing a downturn following the surge in the unemployment rate to a nearly three-year high of 4.3 percent in July.
Twenty-five percent of business owners cited inflation as their top challenge, a 4-point increase from June. This concern, combined with uncertainty surrounding policies ahead of the November presidential election, has kept the NFIB index below its 50-year average of 98 for the 31st straight month. "Owners are facing unpredictable months ahead, unsure of how future economic conditions or government policies will affect their businesses," said NFIB chief economist Bill Dunkelberg.
Despite ongoing concerns, the outlook on inflation is improving. A net 33 percent of business owners reported raising employee compensation, the lowest level since April 2021 and down 5 points from June, reflecting the recent slowdown in wage growth. Additionally, the percentage of owners increasing average selling prices dropped by 5 points to 22 percent, indicating easing price pressures. Meanwhile, only 24 percent planned future price hikes, the smallest share since April 2023 and down 2 points from the previous month.
Cooling inflation and a softening labor market have led many financial experts to believe that the Federal Reserve may start cutting interest rates as soon as September. A 50-basis point cut is still on the table, particularly since the unemployment rate has increased for four consecutive months.
Despite these challenges, business owners are cautiously optimistic, with some anticipating higher sales, though the share remains subdued. Inventory investment plans have also shown a slight uptick, with a net 2 percent of owners planning to increase inventories in the coming months—up 4 points from June. This is the first positive shift in inventory investment plans since October 2022.
However, the labor market continues to present hurdles, especially in sectors like construction, transportation, and retail, where workers remain in short supply. Job openings in construction rose by 4 points from June, and 55 percent of firms reported having vacancies they couldn’t fill. Overall, 38 percent of business owners reported unfilled job openings last month, marking a slight increase of 1 point from June.
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