US Small Business Confidence Improves For Second Month Despite Rising Uncertainty – NFIB

U.S. small business sentiment increased for a second month in a row in May to reach its highest level thus far this year, but the uncertainty perception rose to its highest in three-and-a-half years ahead of the general election, and inflation remained the main worry for business owners, results of a survey by the National Federation of Independent Business showed Tuesday.

The NFIB Small Business Optimism Index gained 0.8 points to reach 90.5, but the reading remained below the historical average of 98 for the 29th month. Economists were looking for a score of 89.8.

The index had sunk to 88.5 in March, which was the lowest level since December 2012.

The Uncertainty Index of the survey climbed nine points to hit 85, the highest reading since November 2020.

“The small business sector is responsible for the production of over 40 percent of GDP and employment, a crucial portion of the economy,” NFIB Chief Economist Bill Dunkelberg said.

“But for 29 consecutive months, small business owners have expressed historically low optimism and their views about future business conditions are at the worst levels seen in 50 years.”

“Small business owners need relief as inflation has not eased much on Main Street,” Dunkelberg added.

The NFIB survey said that 22 percent of owners reported inflation as their single most important problem in operating their business, unchanged from April. Inflation was also the top business problem among owners.

The share of survey respondents planning to hike prices rose to net 28 percent from 26 percent in April. The net percent of owners raising average selling prices was 25 percent, unchanged from April.

Hiring plans among small business also increased in May with the number of businesses planning to add staff rising to 15 percent, the highest reading of the year, from 12 percent.

Financing was a main problem for 6 percent of owners in May, up two points from April. The last time financing as a top business problem was this high was in June 2010, NFIB said.

Small businesses were turning slightly cautious on compensation packages, and 37 percent of owners plan to raise pay in May versus 38 percent in April.

The Federal Reserve is set to announce its latest interest rate decision on Wednesday. The FOMC, led by Chair Jerome Powell, is widely expected to leave the benchmark interest rate at 5.50 percent.

The stronger than expected growth in payroll employment and the increase in average earnings revealed by last Friday’s jobs report damped expectations for a September rate cut.

The strong labor market and wage growth are likely to make policymakers more cautious regarding policy easing. Economists continue to expect at least one interest rate cut this year.

The NFIB’s monthly jobs report had shown that net 18 percent businesses plan to raise compensation in the next three months, down three points from April and the lowest reading since March 2021.

Moreover, 42 percent of all owners reported job openings they could not fill in the current period.

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