US Small Business Sentiment Climbs
In July, the confidence among US small businesses reached its peak in nearly two and a half years. According to the National Federation of Independent Business (NFIB), the Small Business Optimism Index rose by 2.2 points to 93.7, marking the highest level since February 2022. This increase suggests that concerns about an imminent recession might be exaggerated, despite last month's uptick in the unemployment rate.
Inflation Concerns Ease
Businesses continue to express worry about inflation, yet fewer are increasing worker compensation and average selling prices. This trend is promising for the inflation outlook. Many businesses plan to boost their inventories, potentially enhancing the gross domestic product (GDP). This aligns with findings from the Institute for Supply Management regarding a recovery in nonmanufacturing activities, alleviating fears of an economic downturn.
Inflation and Policy Uncertainty
A significant 25% of business owners identified inflation as their primary operational challenge, a 4-point increase from June. Alongside the uncertainty surrounding upcoming presidential elections, these factors have kept the NFIB index below its 50-year average of 98 for the 31st month running.
Compensation and Price Dynamics
Encouragingly, only 33% of owners reported raising employee compensation, the lowest since April 2021, reflecting a slowdown in wage growth. Similarly, the proportion of businesses raising average selling prices fell by 5 percentage points to 22%, indicating weakening price pressures. Additionally, 24% of owners plan to increase prices, the lowest since April 2023.
Outlook on Federal Reserve Actions
The cooling of inflation and easing labor market tensions have led economists to speculate that the Federal Reserve might reduce interest rates in September, with a potential cut of 50 basis points, especially as the unemployment rate has climbed for four consecutive months.
Sales and Inventory Projections
While business owners anticipate higher sales, the levels remain subdued. Encouragingly, 2% plan to invest in inventory over the coming months, a 4-point rise from June. The last positive inventory investment sentiment was recorded in October 2022.
Labor Market Challenges
Despite a slowing labor market, many sectors, particularly construction, transportation, and retail, face a shortage of workers. The NFIB reported a 4-point increase in job openings in construction, with 55% of firms unable to fill vacancies. Moreover, 38% of all business owners reported unfilled job openings, a 1-point rise from June.
