U.S. small business confidence continues to remain upbeat in August

The U.S. small business confidence continues to remain upbeat in August. The NFIB small business optimism index rose 0.1 points to 105.3. The headline print for August came in above the market projections, which had called for a slight drop to 104.9. Readings above the 105 level have been recorded only during select periods, such as in the mid-2000s and 1983.

Movements among the sub-components came in slightly mixed with four recording a gain, five declining, and one remaining unchanged. Rises in expectations for higher sales led the way to 27 percent, followed by the fact that now is a good time to expand, and capital outlay plans. The latter marks the strongest reading since 2006. Furthermore, earnings trends dropped one point but continued to remain elevated at -11, noted TD Economics in a research report.

Most of the labor market indicators dropped in the month; however, they continued to remain at a high level. Small businesses added jobs at a strong rate in August with the average change in employment per firm at 0.18 month-on-month, while plans to increase employment pulled back slightly. When compared with past performance, both indicators show some of the best prints since the mid-2000s.

Job openings also fell, dropping 4 points on the month. However, this followed a five-point rise in the earlier month, leaving the level of job openings at 31 percent. More than half of businesses seeking workers had few or no qualified applicants, with ‘quality of labor’ concerns being the second most vital headwind to growth, right after taxes.

Given already tight conditions, businesses continued to increase worker compensation. However, plans to do so in the coming three months fell for a second straight month, falling one point to 15 percent in August.

Small business sentiment has managed to stay at the post-election gains. While a rebounded view of future conditions has certainly played a part, the boost in optimism has not been just because of a shift in the forward-looking indicators. Businesses have also been recording better nominal sales and earnings trends. This is consistent with stronger demand and improved economic growth recently, especially through the consumer spending channel, stated TD Economics.

The rebound in capital expenditure plans is especially encouraging given that it is the strongest reading since 2006. It seems that improved optimism is finally trickling down to investment intentions, a trend that if sustained is expected to boost business investment and lead to improved productivity.

Meanwhile, the slightly weaker trend in worker compensation plans is a disappointing signal for wage growth. Still, given increasingly tight labor market conditions, it is unlikely to continue. Furthermore, the ‘share of owners that are raising prices’ that is now back at highest level since 2014 is another encouraging sign about inflation, stated TD Economics. Hurricane Harvey is expected to have some distortions to the data ahead, with the added effect of Hurricane Irma to augment volatility.

“Overall, downbeat sentiment among affected businesses is likely to weigh on the headline measure in the near-term, with a subsequent boost to economic activity as reconstruction efforts and a gradual return to normalcy work in the opposite direction”, added TD Economics.

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