U.S. small business optimism index falls in June

The U.S. NFIB small business optimism index dropped in June. After being stable in May, the index fell 0.9 points to 103.6, marking the fourth drop of the year. The headline print was below market expectations for almost a flat reading. Five of the subcomponents dropped on the month, four rose and one remained unchanged. Drops amongst forward-looking indicators led the way, with expectation about a rebound in the economy and higher real sales dropping 6 and 5 points respectively.

Most labor market indicators also dropped. After rebounding throughout the year and recording a strong figure in the earlier month, the change in employment dropped into negative territory in June. Job openings dropped 4 points to 30 percent and plans to rise employment also dropped in June.

Furthermore, the share of companies increasing compensation dropped 4 points to 24, while the share of those planning to hike compensation remained unchanged at 18 percent – a level where the indicator has hovered around for most of the year so far.

Capital outlay plans rebounded a second straight month, rising 2 points to 30 percent, the best since mid-2007, while inventory-related subcomponents also rebounded on the month. The improvement in capital expenditure plans rose in spite of the level of uncertainty remaining elevated relative to its historical median of 66, noted TD Economics.

The report marks the continuation of the slowly fading trend in small business sentiment from its post-election peak, but both the overall index and its expectation sub-components still remain quite upbeat relatively to history.

The moderation in optimism seems to be at least partly attributable to slow progress on the healthcare law and tax reform. Given the considerable obstacles still ahead for both initiatives, certain slowdown in sentiment might still unfold in the months ahead. The widespread drops in most labor subcomponents are disappointing. Furthermore, positive plans regarding raising worker compensation and lifting capital investment point to underlying dependence, stated TD Economics.

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