National Small Business Sentiment Reaches New Six-Month High

by Matthew Wells

Jul 10

National Small Business Sentiment Reaches New Six-Month High

The latest data from the National Federation of Independent Business (NFIB) Small Business Optimism Index's June report  provides a much-needed boost to the morale of small business owners across the country. In June, the index reached its highest reading of the year at 91.5, reflecting growing confidence among small businesses despite ongoing economic challenges. However, it is important to note that this still marks the 30th month below the historical average of 98, highlighting that there is still considerable ground to cover before reaching pre-pandemic levels of optimism.

Climbing Optimism Amid Economic Concerns

Small business owners are navigating a complex economic landscape marked by inflation and fluctuating borrowing costs. However, the resilience of small businesses is evident as optimism continues to rise. This renewed confidence suggests that small business owners are adapting to the current economic climate and finding ways to thrive.

One of the key indicators of this optimism is the plan to raise compensation. Seasonally adjusted, a net 22% of small business owners plan to increase employee compensation in the next three months, up four points from May. This indicates a positive outlook on revenue growth and a commitment to attracting and retaining talent despite the pressure of higher costs.

Inventory Management and Investment Trends

Inventory levels and investment plans also highlight the cautious optimism among small business owners. In June, a net negative 2% of owners viewed current inventory stocks as "too low," an improvement of six points from May's lowest reading since October 1981. Additionally, a net negative 2% plan to invest in inventory in the coming months, up four points from May. These figures suggest that while businesses are still cautious, there is a slight shift towards preparing for future demand.

However, there are signs of caution as well. Fifty-two percent of small business owners reported capital outlays in the last six months, down six points from May and the lowest reading since August 2022. This decline in capital expenditure indicates that while businesses are optimistic, they are also mindful of managing their resources carefully amid uncertain economic conditions.

Borrowing Challenges and Inflation Concerns

Access to borrowing remains a concern for small business owners. Four percent of owners reported that all their borrowing needs were not satisfied, up one point from May and the highest reading since August 2022. This highlights the challenges small businesses face in securing the necessary funds to support their growth and operations. It underscores the importance of finding alternative financing solutions and managing cash flow effectively.

Inflation remains the top issue for small businesses, with 21% of owners reporting it as their single most important problem in operating their business, down one point from May. This persistent concern affects everything from supply chain costs to employee wages, making it a critical area for strategic planning and cost management.

What This Means for Small Business Owners

For local and small business owners, the rise in the Small Business Optimism Index is a positive sign that the economic environment, while challenging, is not insurmountable. The data indicates that small business owners are finding ways to adapt and grow despite inflationary pressures and borrowing difficulties. Here are a few takeaways for small business owners:

1. Strategic Compensation Increases: With a significant number of small businesses planning to raise compensation, it's crucial to balance wage increases with overall financial health. Consider tying compensation adjustments to performance metrics and productivity gains to ensure sustainability.

2. Inventory Management: The improvement in inventory perceptions suggests a cautious but optimistic approach. Small business owners should continue to monitor inventory levels closely and make data-driven decisions to avoid overstocking or shortages.

3. Capital Expenditure Planning: The decline in capital outlays indicates a need for prudent financial management. Focus on high-impact investments that can drive growth and efficiency, and consider delaying non-essential expenditures until economic conditions stabilize further.

4. Alternative Financing: Given the challenges in borrowing, explore alternative financing options such as crowdfunding, peer-to-peer lending, or working with local community banks that understand the unique needs of small businesses.

5. Community Support: Leverage the optimism and support from your local community. Engage with customers, participate in local events, and emphasize the value of supporting small businesses. Strong community ties can help bolster business during uncertain times.

The rise in small business optimism is a testament to the resilience and adaptability of small business owners. By staying informed, making strategic decisions, and leveraging community support, small businesses can continue to thrive even in challenging economic conditions.