The National Federation of Independent reported a slight increase in its Optimism Index for small businesses in July, despite weakening sales.

The NFIB said its Optimism Index in July technically rose 0.7 points to a reading of 95.7. There was little change in the 10 index components aside from the outlook for expansion and business conditions, which accounted for a small gain in the index. But while the index components improved, they remain historically low.

“On the positive side expectations for business conditions and outlook for expansion accounted for virtually all of the net gain in July’s Index,” said NFIB chief economist Bill Dunkelberg in a statement.

“However, capital spending reports continue to remain mediocre, spending plans are weak, and inventories are too large, with more owners reporting sales trends deteriorating than improving. As long as these stats continue to hold, the small business half of the economy will continue to not be able to pull its weight.”

Sales Trends
The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months fell 1 point to a net negative 3 percent, but the NFIB noted that was still one of the very best readings since 2007.

Thirteen percent of the business owners who were polled cited weak sales as their top business problem, but that was one of the lowest readings since December, 2007, at the height of the expansion. Expected real sales volumes posted a 1 point decline, declining to a net 10 percent of owners expecting gains.

Earnings Pressure
Earnings trends among the businesses surveyed were unchanged at a net negative 18 percent (net percent reporting quarter to quarter earnings trending higher or lower), but that was still one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, the NFIB noted, but there appears to be an improvement in profit trends in place, even if they are not historically strong. Still, the NFIB said this is one of the best readings since mid-2007 with the exception of a few months in early 2012 when the economy posted decent growth rates for several quarters.

Two percent of the business owners polled reported reduced worker compensation, while 24 percent reported raising compensation, yielding a seasonally adjusted net 21 percent reporting higher worker compensation, unchanged and the second best reading since the first quarter of 2008. A net seasonally adjusted 14 percent plan to raise compensation in the coming months (up 1 point). The reported gains in compensation are now solidly in the range typical of an economy with solid growth.

Hiring Plans
NFIB owners increased employment by an average of 0.01 workers per firm in July (seasonally adjusted), the tenth positive month in a row and the best string of gains since 2006.  Seasonally adjusted, 13 percent of the owners (up 1 point) reported adding an average of 2.9 workers per firm over the past few months.  Offsetting that, 12 percent reduced employment (down 1 point) an average of 2.7 workers, producing the seasonally adjusted net gain of 0.01 workers per firm overall.

The remaining 75 percent of owners made no net change in employment. Fifty-three percent of the owners hired or tried to hire in the last three months and 42 percent reported few or no qualified applicants for open positions. 

Twenty-four percent of all owners reported job openings they could not fill in the current period. That figure was down 2 points, but still a solid reading. Fifteen percent of the business owners surveyed reported using temporary workers, up 1 point.

Job creation plans at small businesses continued to strengthen in July and rose 1 percentage point to a seasonally adjusted net 13 percent, the best reading since September 2007. Not seasonally adjusted, 16 percent of the business owners who responded to the survey plan to increase employment at their firm (down 2 points), and 6 percent plan reductions (up 1 point). On a seasonally adjusted basis, job creation plans improved and job openings held at a solid level. Actual job creation remained positive, although modestly so.

Credit Conditions
Six percent of the business owners polled in July reported that all their credit needs were not met. That figure was unchanged from June and only 2 points above the record low. Thirty percent reported all their credit needs had been met, and 52 percent explicitly said they did not want a loan. Only 2 percent of the business owners reported that financing was their top business problem, compared to 22 percent who cited taxes, 22 percent who cited regulations and red tape, and 13 percent who cited weak sales.

The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 5 percent. More business owners indicated they expect that it will be “harder” to arrange financing than easier (a 2 point improvement). This is the most favorable reading about credit market conditions since 2006, occurring at a time when the Federal Reserve is terminating its aggressive quantitative easing policy. 

Inventory Trends
The pace of inventory reduction at small businesses was steady in July, with a net negative 3 percent of all the business owners polled reporting growth in inventories (on a seasonally adjusted basis). On balance, more firms appear to be reducing inventory than building stocks.

The net percent of business owners who said they view current inventory stocks as “too low” worsened 1 point to a net negative 3 percent, mild dissatisfaction which will depress inventory investment. Sales trends continued to deteriorate a bit but remained near the best levels in the recovery, just historically weak.

Expected real sales did not improve as well, and this contributed to less urgency to rebuild stocks. The net percent of business owners who said they plan to add to inventory stocks rose to a net 0 percent. While inventories have been building solidly at the national level, it appears that the small business sector is adding little to the accumulation of stocks reported in the GDP accounts and sales are too weak to produce much liquidation.

Inflation Experience
Twelve percent of the NFIB owners reported reducing their average selling prices in the past three months (up 2 points), while 25 percent reported price increases (up 2 points). On a seasonally adjusted basis, the net percent of owners who reported raising their selling prices was a net 14 percent, unchanged from June and 15 percentage points higher than in December.

Twenty-three percent of the business owners polled said they plan to raise average prices in the next few months (up 1 point), while only 3 percent plan reductions (unchanged), far fewer than actually reported reductions in past prices. Seasonally adjusted, a net 22 percent plan price hikes (up a point and one of the highest readings since 2008).  If owners continue to be successful, the NFIB noted, the economy will see a bit more “inflation” as the price indices seem to be suggesting.

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