Small Business Owners' Optimism Rose Slightly in July

By Sarah Lynch, Inc. (TNS)

The outlook of small business owners is slowly improving, which isn’t necessarily good news.

The latest reading from the National Federation of Independent Business’s Small Business Optimism Index, which was published Aug. 9, ticked up from 91.0 in June to 91.9 in July—the highest level of 2023 so far. Still, that remains historically low, with July marking the 19th consecutive month below the 49-year average of 98.

Indeed, the latest NFIB report reveals both signs of progress and the still-present challenges that plague business owners in this uncertain economic environment.

Last month, inflation and labor quality tied as the top concern for small business owners, but responses in both categories eased up in July: 21% of business owners listed inflation as their top concern and 23% listed labor quality, down from 24% for both in June.

But a closer look reveals still historically high readings on both fronts. The net percentage of business owners hiking prices fell to its lowest level since January 2021 at a net 25%, but this remains inflationary. For some context, this reading did not exceed 20% in any month from 2018 to 2020. Meanwhile, 42% of business owners said they had job openings they couldn’t fill, the same as in June. This reading remained below 40% from 2018 to 2020.

Business owners expecting higher real sales improved by two percentage points to a net negative 12%, but the report still deemed this “a very dismal posture.” Likewise, the number of business owners expecting better business conditions in the next six months increased by 10 percentage points in July—after a 10-point bump up in June, as well—but was still “historically very negative” at a net negative 30%, according to the report.

And yet, if business owners turn their attention toward consumers, they could find more encouragement. “With small business owners’ views about future sales growth and business conditions dismal, owners want to hire and make money now from solid consumer spending,” said Bill Dunkelberg, the NFIB’s chief economist, in the press release.

Indeed, the latest gross domestic product report from the Bureau of Economic Analysis showed that consumer spending still drove much of the increase in U.S. economic growth in the second quarter, even though spending did decelerate from the first quarter overall.

That strength is due at least in part to a resilient labor market and low unemployment that’s given workers some cash to spend. The July jobs report shows that employers added the fewest number of jobs so far this year at 187,000, but economists say that’s still a solid report.

Yet, as the NFIB report shows, this strong labor market also means that finding talent remains tough for small business owners: A third still struggle to find qualified applicants for their open positions, and that issue is particularly challenging in sectors like construction, manufacturing, and transportation, according to the report.

That continued demand for talent helps explain why a net 38% of business owners raised compensation in July, up two points from June—mirroring the continued increase in average hourly earnings in the July jobs report. Though the recent Employment Cost Index indicated some weakening in wage pressure in the second quarter overall, it’s clear small business owners aren’t feeling that relief quite yet.

Yet progress—while incremental—is still progress. And on the inflation front, the Consumer Price Index coming later this week could give business owners a sense of whether this ease will continue or come to a screeching halt.

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