Index: Small business optimism improving, but not yet average

William Dunkelberg
William Dunkelberg

A monthly measure of optimism among small business owners has climbed to its highest level in nearly seven years, yet still remains below its long-term average.

The National Federation of Independent Business reported that its Small Business Optimism Index rose 1.4 points to 96.6 in May. The reading is the highest since September 2007, but still below the average reading of 100 for the index between 1973 and 2008.

Bill Dunkelberg, chief economist for the NFIB, said the May gain in the index was driven by more upbeat expectations for improving business conditions and sales than plans to increase staffing, inventories or capital outlays — components more closely related to gross domestic product, the broad measure of goods and services produced in the country.

“With prices being raised more frequently in response to rising labor and higher energy costs, it is clear that small businesses are unwilling to invest in an uncertain future,” Dunkelberg said. “As long as this is the case, the economy will continue to be bifurcated, with the small business sector not pulling its historical weight in the GDP numbers.”

The NFIB bases its index on the results of monthly surveys of members of the small business advocacy group. For May, five of 10 components of the index advanced, while four retreated and one remained unchanged.

The proportion of small business owners responding to the survey upon which the May index was based who expect the economy to improve jumped nine points, but remained at a net 0 percent.

A net 24 percent of owners said they plan to make capital outlays, down a point. A net 10 percent of owners said now is a good time to expand, up two points.

The share of owners who said they plan to increase staffing rose two points to a net 10 percent, approaching what’s considered more normal levels for a growing economy. A net 24 percent of owners reported hard-to-fill job openings, unchanged from last month.

The proportion of owners who expect increased sales increased five points to a net 15 percent, the highest reading since 2007. Just 12 percent of owners cited weak sales as their most challenging business problem, the best reading since December 2007.

Those expectations didn’t translate into plans to increase inventories, though: A net 1 percent of owners reported plans to increase inventories, down two points.

Reports of positive earnings trends rose three points, but remained at a net negative 17 percent. While rising labor costs exert pressure on earnings, owners report improving profit trends.