The NFIB’s small business optimism index dropped in June to 89.5 from 93.1 in May, below the consensus forecast, which expected the index to dip marginally to 92.5. The index has been below the historical average since the beginning of the year.
All ten subcomponents declined. Firms, expecting higher real sales collapsed by 13 points, while those expecting the economy to improve and planning to increase employment fell 7 points each. Small businesses believing that now is a good time to expand fell by 3 points and so did those reporting inventories “too low” and planning to add more inventories. The remaining sub-components deteriorated marginally by 1 or 2 points.
Labor market indicators were mixed in June. A net 48% of firms raised compensation to attract workers (down 1 point over May), but 28% of firms are planning to raise compensation in the next 3 months (up from 25% in May). Firms planning to increase employment dropped by 7 points to 19%, while the number of firms with unfilled job openings declined by 1 point to 50% – still relatively high by historical standards.
Key Implications
This was a glass more than half empty report as a greater share of small business owners are becoming increasingly bearish on the economy. Firms expecting better business conditions dropped to the lowest level in the history of the survey, with a smaller proportion of firms expecting higher real sales and fewer firms able to raise prices. This suggests that business are not confident they will be able to pass rising costs to consumers going forward.
Despite this, demand for labor remains high with a much higher than average share business owners unable to fill job vacancies. Firms continue to raise red flags about the quality of labor supply, with roughly a quarter of them reporting it as the single most important factor. Businesses may be able to attract higher quality workers by raising wages and, indeed, many firms are doing or planning to do so.
Higher costs are expected to erode profits and is the reason business optimism is deteriorating. And so it may continue until we see further easing in the current labor demand-supply mismatch accompanied by softer price gains. We’ll report on the latter tomorrow morning. Stay tuned!
