July 2017 Small Business Optimism

Proprietors of small companies are feeling better about the future for the first time in five months according to the National Federation of Independent Business.  Their Small Business Optimism Index sits at 105.2 as it jumped 1.6 in July 2017.  This tally is the third highest of the current business cycle and the second best count of this year.  Only December 2016 and January 2017 with readings of 105.8 and 105.9 respectively have been higher during the current economic expansion. 

Of the 10 components making up the index, seven improved, two fell, and one remained unchanged.  Expectations for improving revenues and job openings led the indicator higher with the largest monthly upticks.  Affirmative responses regarding plans to increase employment and improving economic outlooks followed closely behind.  Also contributing positively to the index were the categories covering now being a good time to expand, plans to increase inventories, and current inventory levels.  Only plans to make capital outlays and expected credit conditions declined.  Finally, responses to earnings trends were unchanged.

Looking further into the report, there was a note on hiring that is interesting.  Sixty percent of business owners surveyed indicated they hired or tried to hire in the period.  However, 87 percent of them reported few or no qualified applicants for the positions they were trying to fill.  If this continues, firms may need to compete for candidates by presenting more lucrative offers to potential employees. 

Slow wage growth has perplexed the best of economists during this business cycle. Traditionally, forecasters expect a more inverse relationship between the unemployment rate and pay than has been the case since the end of the Great Recession in June 2009.  Latest figures from the Bureau of Labor Statistics show that over 95 percent of those in the labor force are employed, but there has been little upward pressure on wages or in official inflation statistics.  Nonetheless, if what small business owners are indicating about qualified candidates becomes a growing phenomenon, the labor market might just start a bidding war that helps the Federal Reserve’s quest to increase inflation.