In July, the small business confidence index in the United States surged to the highest level in nearly two and a half years, indicating that concerns about an economic recession may have been exaggerated following reports of rising unemployment last month.
According to Reuters, the National Federation of Independent Business (NFIB) announced on Tuesday, August 13, that its Small Business Optimism Index rose by 2.2 points last month to 93.7, the highest level since February 2022.
While businesses continue to worry about inflation, the report noted that fewer companies reported raising worker compensation and average selling prices. This bodes well for the outlook on inflation. More businesses are planning to increase inventory in the coming months, which could contribute to growth in Gross Domestic Product (GDP).
A survey conducted by the Institute for Supply Management (ISM) last week showed an uptick in the non-manufacturing Purchasing Managers’ Index (PMI), alleviating concerns about the economy slipping into recession or being on the brink of one after the sharp rise in the unemployment rate to a near three-year high of 4.3% in July.
25% of business owners stated that inflation was the most significant issue they faced in managing their businesses, a 4-percentage-point increase from June. Coupled with concerns about policy uncertainty ahead of the presidential election in November, the NFIB Small Business Optimism Index has remained below the 50-year average of 98 for the 31st consecutive month.
NFIB Chief Economist Bill Dunkelberg commented, “Business owners are moving into an unpredictable few months ahead, unsure of how the future economic conditions or government policies will impact them.”
However, the inflation situation is showing signs of improvement.
A net 33% of business owners reported raising employee compensation, the lowest level since April 2021 and down 5 percentage points from June, aligning with the recent trend of slowing wage growth. 22% of business owners increased average selling prices, down by 5 percentage points from June, consistent with the trend of weakening price pressures.
Furthermore, 24% of business owners planned to raise prices, the smallest increase since April 2023, and a 2 percentage point decrease from June.
The easing of inflation and a loose labor market have led financial markets and economists to conclude that the Federal Reserve will begin cutting interest rates in September. There is a possibility of a 50-basis-point cut, especially considering the consecutive four-month rise in the unemployment rate.
Business owners also anticipate higher sales volumes, although they are still at subdued levels.
The net share of business owners planning inventory investments in the coming months increased by 2%, up 4 percentage points from June. The last time inventory investment plans were positive was in October 2022.
Despite a slowdown in the labor market, workers are still in short supply, particularly in the construction, transportation, and retail sectors. NFIB pointed out that job openings in the construction industry increased by 4 percentage points compared to June, with 55% of companies having unfilled job positions.
Last month, 38% of business owners reported unfilled job positions, up 1 percentage point from June.