Small business optimism improves slightly in September, while some worries about future sales persist

The NFIB's small business optimism index edged up 0.2 points in September, landing at 96.1 - precisely in line with the six-month moving average. Today's reading came in above market expectations, which called for a slight pullback in the index to 95.5.

Looking beneath the headline number, the details of the report were broadly encouraging. Seven out of ten subcomponents recorded meaningful gains of between 1 and 2 points on the month. However, the declines recorded in the remaining three subcomponents tempered the overall optimism figure.

Small businesses had an improved view on the economy in September with the net percentage of firms expecting improvement in the economy gaining 2 points on the month. Other significant increases were recorded in the net share of firms reporting higher earnings, planning to increase inventories, and those stating that now is a good time to expand - all which rose by about 2 points apiece.

Concerns about the prospects for higher sales were a significant thorn in the side of the report. The net percentage of firms expecting higher sales in the next six months fell by 6 points to just 1 percent - the lowest level since early 2013. Labor market indicators also pulled back slightly, with the percentage of firms finding it hard to fill positions and those planning to increase employment declining by 2 and 1 points, respectively. 

Recent economic indicators have generally substantiated the notion that the U.S. economy is not immune to the slowdown in global growth. Fortunately, small businesses tend to be more shielded from external factors given their domestically oriented business model. Today's report corroborates that viewpoint having climbed slowly but steadily for three consecutive months, with this morning's results broadly encouraging, especially given the improved view on the economy and the pickup in business expansion plans.

The slight pullback in labor market indicators is somewhat disappointing. But, looking past some inherent monthly volatility, they remain near post-recession highs. Additionally, signs of potential wage gains are a bright spot in today's report, with the net share of firms planning to raise worker compensation in the next three months at the highest level since December 2014.

"Small and medium businesses continue to be concerned about future sales, with the pullback in the sales outlook in September running somewhat contrary to the improved feelings about the economy. Still, we believe this subcomponent should see some improvement in the months ahead as domestic demand remains robust, buoyed by the windfall from lower gasoline prices and improving labor market outcomes, which should support consumers' purchasing power well into next year", says TD Economics.