The outlook for small businesses in the U.S. appears more optimistic than some of Wall Street’s recession forecasts, as highlighted in a recent report from the National Federation of Independent Businesses (NFIB). This shift in sentiment is critical as the broader economy continues to show resilience despite ongoing challenges such as persistent inflation and elevated interest rates.
The NFIB, which represents smaller U.S. companies that contribute around half of the country’s economic growth, reported a significant boost in owner optimism in July. The headline reading of 93.7 marks the highest level of optimism since April 2020. While this figure is still below the long-term average of 98, it suggests that small business owners are increasingly confident in the economic outlook, driven by stronger demand and expectations for continued growth.
One of the key indicators of this optimism is the increased willingness of small business owners to invest in inventory, signaling their belief in solid demand over the coming months. Additionally, a net 38% of those surveyed reported having job openings they could not fill, highlighting a tight labor market that continues to put upward pressure on wages. This is particularly noteworthy given that small businesses typically account for about 55% of overall hiring in a typical year.
The hiring aspect of the report is crucial for both the Federal Reserve and market participants tracking inflationary pressures. The tight labor market, coupled with wage growth, could complicate the Fed’s efforts to bring inflation back to its target levels. However, the NFIB’s hiring intentions survey, which is released ahead of the Labor Department’s nonfarm payrolls report, showed little change from June, indicating that hiring plans remain steady despite the economic uncertainties.
Despite the positive sentiment, the NFIB’s chief economist, Bill Dunkelberg, cautioned that small businesses are not out of the woods yet. He noted that while the higher optimism readings are encouraging, challenges such as rising labor costs and persistent inflation continue to weigh on small business operations. Dunkelberg emphasized that owners are bracing for unpredictable months ahead, as they navigate the uncertain economic environment and potential changes in government policies.
Interestingly, the report also pointed out that U.S. banks reported flat demand for credit in the second quarter. This is notable because it marks the first time in two years that credit demand has not declined, suggesting a potential stabilization in borrowing activity. This could be a sign that businesses are cautiously optimistic about the future and are willing to take on new loans to fund expansion and operational costs.
However, the NFIB report also underscores the challenges that high interest rates pose for small businesses. Many in the sector rely heavily on bank lending to finance their growth and day-to-day operations, and the current high-rate environment has made borrowing more expensive. Traders are betting that the Federal Reserve is likely to begin cutting interest rates as early as next month, which could provide much-needed relief to small businesses and support further economic growth.
The broader U.S. economy continues to outperform expectations, with strong growth measures that defy the recession forecasts of some analysts. The Atlanta Fed’s GDPNow forecasting tool projects a growth rate of 2.9% for the current quarter, following a solid 2.8% growth rate in the second quarter, as reported by the Commerce Department.
Despite the concerns of a potential recession, some large investment firms, such as BlackRock, remain optimistic about the U.S. economy. BlackRock’s latest investor update notes that while there is evidence of a slowdown, it does not necessarily point to a recession. The firm remains overweight in U.S. stocks, particularly in the tech sector, which has shown strong earnings performance.
This cautious optimism is further supported by the latest employment data, which, despite a slight uptick in the unemployment rate, still shows a robust labor market. The rise in the unemployment rate is attributed more to an increase in the labor force, partly due to immigration, rather than significant job losses. Over the past six months, U.S. payrolls have grown by more than 1 million jobs, a figure that is well above typical pre-recession levels.
In summary, while small businesses are facing headwinds from high labor costs and inflation, their increasing optimism and investment intentions suggest that they could play a crucial role in countering recession fears. The coming months will be pivotal as the Federal Reserve’s decisions on interest rates and broader economic conditions will likely determine the trajectory of both small businesses and the wider U.S. economy.