Small Business Optimism Retreats

The Small Business Optimism Index retreated by 0.6 points in June to 107.2, the sixth highest reading in the NFIB survey's 45 years history. Beating the consensus forecast calling for a more substantial decline after May's upward surge to the second highest level in the history of the survey, the optimism index remained exceptionally strong in June mainly thanks to improvement in the employment and inventory components. Gains of 2 points to a net 20 percent in plans to increase employment and in plans to increase inventories to a net 6 percent were accompanied by a 4-point gain to a net 0 percent of business owners viewing current inventory levels as too low and a 3-point gain to a net 36 percent in current job openings. Expected credit conditions were the last among the gainer components in June, rising 1 point to a net minus 4 percent.

Despite the stronger than expected index reading for the month, half of the 10 survey components posted declines, most of which were sizable, though mostly from very strong levels, led by expectations of higher real sales, which fell 5 points in June to a still very solid net 26 percent. A drop of 5 points to a net 29 percent was also seen in the view that now is a good time to expand, while expectations that the economy will improve fell 4 points to a net 33 percent and earnings trends also shed 4 points to a net minus 1 percent. Plans to make capital outlays fell 1 point to a net 29 percent.

Business owners surveyed continued to point to difficulties in finding qualified workers and identified this as the single most important business problem, as 36 percent reported job openings they could not fill in the current period, up 3 points and matching the survey record high set in November 2000. Openings for skilled workers were reported by 31 percent of small firms while 13 percent have openings for unskilled labor, both ahead of the May readings.

The survey also showed the threat of inflation as subdued in the current environment, with the net percent of owners raising average selling prices falling 5 points to a seasonally adjusted net 14 percent, and a net 24 percent planning price hikes, down 2 points from the prior month. Perhaps surprising given the tightening on the jobs front, reports of higher compensation were down 4 points from May's record reading to a net 31 percent, though plans to raise compensation did rise by 1 point to net 21 percent.