Posted July 14, 2023

Small businesses get a dose of optimism in June

The NFIB Small Business Optimism Index shot up 1.6 points to 91.0 in June, the largest over-the-month upswing since August 2022, wrote Wells Fargo economists Charlie Dougherty, Jackie Benson, and Patrick Barley.

The economic outlook also brightened for small firms. The percentage of owners expecting the economy to improve over the next six months rose 10 points to a net -40% in June. Although still historically low, the share is up from a low of -61% in June 2022. The net proportion of owners that believe the next three months would be a good time to expand also improved three points to 6%.

Inflation and labor quality were tied as the most important problems facing small businesses in June. Yet, responses from the survey indicate that progress is being made on both fronts.

Small business price hikes continue to ease off of recent highs. In June, the net percentage of small businesses that reported raising their prices over the past three months ticked down to 29%, down three points from May. June's reading was less than half the percentage reported one year ago.

That noted, the percentage of firms expecting future price increases ticked up slightly to a net 31%. This proportion remains well below the recent peak reached in May 2022, however.

Although labor remains a top concern, small businesses seem to be benefiting from recent improvements in labor supply. A net 42% of firms found that job openings were hard to fill in June, the second lowest reading of the last year.

That said, owners also seem to be pulling back on hiring. A net 15% expect to increase payrolls over the next three months, down four points from the prior month and tied with March for the lowest reading since the pandemic recession.

Better labor supply on top of weaker labor demand looks to have elicited somewhat softer wage pressures. The net percentage of owners reporting they raised employee compensation over the past three months slipped five points to 36%, the lowest reading since May 2021.

The prospect of consumer resilience seems to be contributing to the up-shift in optimism. Actual sales slipped over the month, with a net -10% of owners reporting higher sales in June, down from -8% in May. However, the percent expecting an upturn in real future sales improved to a net -14%.

Credit for small firms remains relatively tight, but conditions do not appear to be deteriorating at present. The net percentage of firms facing greater barriers to credit over the last three months held at 6% in June. While up a bit compared to the 2021 average, the share has remained steady over the past three months.

Despite higher financing costs, more small businesses look to be planning a capital expenditure in the near term. A net 25% of owners indicated they planned on making capital outlays during the next three to six months. This share was unchanged over the month, but has improved slightly compared the first quarter of the year.

View charts here.