Small Business Optimism Index Rises 3 Points

The Small Business Optimism Index rose 3 points in May to 107.8, the second highest level in the 45-year history of the survey which easily exceeded the range of analysts' forecasts and the consensus expecting a modest rise to 105.2. Leading the monthly index higher was a 10-point increase in expectations of higher real sales to a net 31 percent and increases of 7 points each in the view that now is a good time to expand (to a net 34 percent) and expectations that the economy will improve (to a net 37 percent).

But the rise in optimism among small business owners was broad-based, with 8 of the 10 components of the index showing improvement. Contributing to the overall gain were plans to increase inventories, which rose 3 points to a net 4 percent, earnings trends, rising 4 points to net 3 percent and a survey record, plans to make capital outlays, up 1 point to a net 30 percent, and expected credit conditions, which rose 1 point but remained negative at a net minus 5 percent.

The employment front provided the only decline albeit from a very high level, with current job openings falling 2 points to a net 33 percent. But employment remains robust and the job market very tight, with a net 18 percent of small business owners planning to increase employment, up 2 points from prior month. A shortage of qualified workers continues to plague small business owners, with concerns about labor quality at the second highest level in the survey's history. While 58 percent of firms reported hiring or trying to hire, 83 percent of those firms reported few or no qualified applicants for the positions they were trying to fill. A result of the qualified labor shortages was higher worker compensation, where reports rose 2 points to a net 35 percent of all firms, a record for the 45 years of the survey.

And it was probably these rising compensation costs that helped pressure prices higher in May, with reports of price hikes the highest since 2008. The net percent of owners reporting raising average selling prices was up 5 points to 19, and on a seasonally adjusted basis, a net 26 percent plan price hikes, up 4 points from the prior month.

Record levels of optimism by small business owners on several fronts and the highest inflation pressures in 10 years as owners raise price to offset higher compensation costs bolsters the case for a tighter monetary policy by the Fed.