– August 14, 2018

The Small Business Optimism Index from the National Federation of Independent Business rose 0.7 points in July, coming in at 107.9 versus 107.2 in June. The July result was the second-highest in history, just 0.1 points below the record-high 108.0 in July 1983. The latest result extends a run of 20 consecutive months above 100, a very high level by historical comparison (see chart). Most of the individual indicators that make up the overall optimism index held steady or improved in the latest month, and many are at very high levels. A significant concern among small businesses is the declining quality of the available labor force, particularly in the context of an already-tight labor market and robust plans for increased hiring in the near future.

According to National Federation of Independent Business chief economist Bill Dunkelberg, “Small business owners have never been so optimistic for so long, helping to power the second longest expansion in history. Despite challenges in finding qualified workers to fill a record number of job openings, they’re taking advantage of this economy and pursuing growth.” NFIB president and CEO Juanita Duggan added, “Small business owners are leading this economy and expressing optimism rivaling the highest levels in history. Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions.”

The general outlook remained positive as the percentage of respondents believing now is a good time to expand came in at 32, up from 29 in June. July was just two points below the cycle-high of 34 in May and well above the single-digit percentages seen for most of 2016. The net percentage of respondents expecting better economic conditions (“better” minus “worse”) came in at 35, up from 33 in June and quite high compared to the negative numbers from 2016. A net 29 percent expected higher sales over the coming months while a net 8 percent reported higher sales for the most recent three months versus the prior three months. That net 8 percent is in line with February through April but below the net readings of 15 and 10 in May and June, respectively.

The percentage of firms planning to increase employment rose to a record 23 percent from 20 percent in June. A record 37 percent of firms report having openings they are not able to fill at the moment. At the same time, the percentage of firms reporting few or no qualified applicants for job openings was 52 percent, just below the record-high 55 percent in June. That combination in the labor market of healthy demand and weak supply has a net 22 percent of firms saying they intend to increase worker pay over the coming months.

The labor-market dynamics have made quality of labor the most important issue for small businesses. Among the 10 issues listed in the survey, quality of labor ranks first at 23 percent, a record high; taxes came in second at 17 percent, down sharply from the survey high of 32 percent; and government regulation and red tape was third on the list at 14 percent, also well below the survey high of 27 percent. At the bottom of the list were inflation, and financing and interest rates, with just 2 percent saying these two were significant issues. Inflation has been at the bottom of the list for several years, reflecting the slow pace of price increases over the current cycle. Cost of labor and slow sales were tied for third-lowest; cost of labor has been drifting up in recent years, reflecting the tightening labor market, while sales remains near the low by historical comparison.

Robert Hughes


Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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