U.S. small-business confidence surged to its highest level in nearly two and a half years in July, signaling that fears of an impending recession may have been overstated. On Tuesday, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index rose by 2.2 points to 93.7, the highest since February 2022.
Despite ongoing concerns about inflation, fewer businesses reported raising worker compensation and average selling prices, which could be a positive sign for the inflation outlook. Additionally, more small business owners plan to increase inventory in the coming months, potentially boosting the gross domestic product (GDP).
This report aligns with a recent survey from the Institute for Supply Management, which showed a rebound in its nonmanufacturing PMI, further easing concerns about an economic downturn. The fears were initially triggered by a sharp increase in the unemployment rate, which reached a nearly three-year high of 4.3% in July.
However, challenges remain. Inflation continues to be a significant issue, with 25% of small business owners identifying it as their most pressing problem, a 4-point increase from June. This, coupled with uncertainty surrounding the upcoming presidential election, has kept the NFIB index below its 50-year average of 98 for the 31st consecutive month.
NFIB Chief Economist Bill Dunkelberg noted that small business owners are bracing for unpredictable months ahead, with concerns about future economic conditions and government policies.
On the positive side, 33% of owners reported raising employee compensation, the lowest level since April 2021, reflecting a slowdown in wage growth. Additionally, the share of owners increasing average selling prices dropped to 22%, aligning with easing price pressures. Plans for future price hikes have also decreased, with only 24% of owners planning increases, the smallest share since April 2023.
The cooling inflation and a slowing labor market have led financial markets and economists to speculate that the Federal Reserve may start cutting interest rates as early as September. Given the rise in unemployment over the past four months, financial authorities have not ruled out a potential 50-basis-point rate cut.
Business owners are also anticipating higher sales, though the outlook remains cautious. Inventory investment plans have turned positive for the first time since October 2022, with a net 2% of owners planning to invest in inventory in the coming months, a 4-point increase from June.
Despite the slowing labor market, there remains a shortage of workers, particularly in the construction, transportation, and retail industries. The NFIB reported that job openings in construction increased by 4 points from June, with 55% of firms unable to fill vacancies. Overall, 38% of all small business owners reported job openings they could not fill last month, a 1-point increase from June.
