Small Business Optimism Index At Second Highest Level In Survey History

The Small Business Optimism Index rose by 0.7 points in July to 107.9, the second highest level in the survey's 45-year history and within 0.1 points of the July 1983 record high. Helping to push the index higher and exceed the range of analysts' expectations were new records on the employment front: for owners reporting new job creation plans, up 3 points from June to a net 23 percent, and those with job openings they could not fill, up 1 point to a net 37 percent. Also leading the components boosting the index were expectations of higher real sales, which rose 3 points in July to a net 29 percent.

The July rise in small business optimism was driven by 6 of the 10 components of the index, including expectations that the economy will improve, which rose 2 points to a net 35 percent, while a net 32 percent of small business owners reported they thought that now is a good time to expand, up 3 points from the June. Also increasing versus June were plans to make capital outlays, which rose 1 point to net 30 percent.

However, despite the near record high of the index, 4 of the 10 components remained marginally but stubbornly pessimistic or fell further into pessimistic (on balance) territory. Inventories, which posted gains in June, albeit from weak levels, were a drag on the overall index in July, as small business owners' plans to increase inventories fell 2 points in July to a net 4 percent and the view that current inventories are too low fell 3 points to minus 3 percent. Expected improvement in credit conditions remained unchanged from June and the weakest of the 10 components at a net minus 4 percent. Earnings trends also refused to budge, remaining unchanged at minus 1 percent,though this is nevertheless one of the best readings in the survey's history.

On the inflation front, in a measure that falls outside of the overall index, the net percent of owners raising average selling prices rose 2 points to 16 percent. As reports of increased compensation ran at record levels, with a net 32 percent of firms reporting wage increases, up 1 point from June, there is more pressure to pass these costs on through higher selling prices, according to the NFIB. Shortages were also pushing prices higher, especially in construction, where 41 percent of firms report raising average selling prices, substantially more than in any other industry group.

With small business owners expecting higher sales, raising prices, and still almost desperately seeking new employees at historically record rates, the July survey indicates expansion activities at small firms are very busy and not losing any momentum. The survey's inventory cautiousness at such a time is a curiosity and also suggests that restocking may fuel future growth.