Confidence Among Small Business Owners Unexpectedly Jumps to Better Than Usual

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The small business apocalypse has been called off.

When the federal government’s pandemic economic support ran dry at the end of July, many predicted that small businesses would be hard hit. Instead, small business confidence rose more than expected, the fourth increase in the past five months, according to data from the National Federation of Independent Business released Tuesday.

The NFIB Small Business Optimism Index came in at 100.2 in August, a 1.4 point gain from July’s 98.8 reading. That is slightly above the historical 46-year average.

Economists polled by Econoday had expected the index to edge up to 98.9.

“Small businesses are working hard to recover from the state shutdowns and effects of COVID-19,” said NFIB Chief Economist Bill Dunkelberg. “We are seeing areas of improvement in the small business economy, as job openings and plans to hire are increasing, but many small businesses are still struggling and are uncertain about what the future will hold.”

The NFIB index is baed on a survey is a monthly survey of small business owners in the U.S. It is looked to for hints about the strength of domestic demand and—because small businesses employ so many workers—the health of the labor market.

The labor market signals from the report are positive. Job creation plans increased three points to a net 21 percent and job openings also grew by three points to 33 percent.

Seasonally adjusted, a net 18 percent reported raising compensation. The percent of owners raising compensation remains well below the 36 percent reading in February before COVID-19 policies were implemented, the NFIB noted.

The percentage of owners thinking it is a good time to expand rose seven points to 12 percent. Plans to increase inventories rose two points to a net six percent. The share businesses planning to make capital outlays was unchanged at a net 26 percent.

Expectations among small-business owners for the economy to improve fell one point but remained well into positive territory, with a net 24 percent. Expectations for higher sales fell two points to a net positive 3 percent.

Earnings trends jumped 16 points but remain deeply underwater at a net negative 25 percent. Expectations for credit conditions improved one point but were still at a net negative 4 percent.

In all, seven of the index’s ten components improved, two declined, and one was unchanged. Eight of the ten were in net positive territory, and two were negative.

 

Dunkelberg offered this analysis:

The economy fell so far in April that any increase in activity, expressed as a percentage of the prior periods, looks a lot better. For example, motor vehicles and parts production rose almost 500% over the past three months, which got output back to pre-Covidlevels. Production of computers and electronic did almost as well. Although 8% below February levels, overall production increased a solid 10% over the past three months. Consumption of goods increased faster than production, resulting in a huge decline in inventories (negative investment) which reduced the GDP growth rate by 4 percentage points. Small business owners noticed and are leading the way with plans to spend more.

Retail sales were up but the performance was uneven. Sales at restaurants and bars rose, butremain 20% below February levels. The same holds for sales at clothing and accessories stores. Spending at home repair and garden stores surged in May and June but flattened in July. The consumption of goods already exceeds pre-pandemic levels, but services expenditures are lagging, leaving total consumption below February levels.

From this point, the good news is growth percentages will be solid in terms of percentages and in real terms as well. Consumer spending will continue, but with no new federal support, spending will slow. Consumers sentiment is not heavily supportive. Housing is on a roll and will continue its current performance. Service sector indicators indicate slower gains because the rush to “open up” has been blunted by the Covid-19 resurgence. More small businesses opening up larger states will cause these numbers to improve.

The NFIB surveyed 751 small businesses for the August index.

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