The small business optimism index rose 1.6 points in July to 105.2, as significant gains in hiring activity pushed the reading to the highest level since February and just short of the 12-year high set in January. The solid increase surprised most analysts, surpassing not only the consensus forecast but the upper limit of the range of forecasts. And it was strong consumer demand that gave a boost to the index, according to the NFIB, which noted that business owners are feeling better about the economy because customers are feeling better about it.
Among the 10 components making up the index, 7 improved, 2 fell and 1 remained unchanged. Leading the gains was the employment front, with job openings rising 5 points to 35 while job creation plans rose 4 points to 19. But the strength of the index was broad-based, with expected sales co-leading the improving components by erasing the decline posted in June and rising 5 points to 22. And expectations of better business conditions, which have been the strongest of the components but also dipped in the prior month, rose 4 points in July to the outstandingly high reading of 37. Optimism about business expansion, already very strong in prior months, became stronger still, with owners believing that now (July) is a good time to expand increasing by 2 points to a net 23 percent. Among the gaining components were also laggard inventories, with inventory plans rising 1 point to 5 while inventory satisfaction rose 1 point to a minus 2.
Only slightly tarnishing the picture of exceptional strength of the NFIB report was a 2 point decline in capital expenditure plans, though at 28 they remain the third strongest component. And the two weakest components of the index remained depressed, with expectations of easier credit conditions falling 1 point to a minus 4 and actual earnings trends remaining the most pessimistic, unchanged at minus 10.
Obscured by the high optimism expressed by small business owners in the survey, however, are also elements of frustration. The NFIB said that 87 percent of the 60 percent of small business owners trying to hire in July had a tough time trying to find workers with specific skills, a problem most severe in construction and manufacturing. Thus, while a tight job market may point to higher wages and rising consumer spending down the road, which is also good for small businesses, the current expansion efforts by small business owners are being choked by their difficulties in hiring and keeping workers.
The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.
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