US Small business sentiment takes a hit in June

The NFIB's small business optimism index tumbled by 4.2 points in June to 94.1 - the lowest reading in more than a year. The headline number came in considerably below the consensus estimate, which called for the index to edge up slightly from 98.3 to 98.5.The details of the report were broadly disappointing, with nine of ten index components declining and one remaining unchanged on the month.

"The biggest declines were in earnings expectations, with the share of firms expecting higher earnings this quarter over last falling by 10 points, reversing all of May's gain. With earnings and sales expectations (-3 points) souring on the month, plans to increase inventories also posted a significant decline (-8 points). Survey respondents also felt less optimistic about the U.S. economy, with this component falling by 6 points", notes TD Economics.

Components related to labor market performance also backtracked on the month. The share of firms planning to boost hiring fell by 3 points to the 9-months low. The share of firms unable to fill positions - a proxy for labor market tightness -posted an even bigger decline (-5.0 points). The share of firms planning to raise workers' compensations also deteriorated (-3 points), falling to the lowest level since January 2014, says TD Economics.

Key Implications

• This was an unexpectedly weak report, running contrary to June's performance of consumer confidence and other indicators of economic activity, such as the ISM surveys. The poor showing of the NFIB survey in June has brought to an end to an encouraging trend, offsetting all of the gains in the index seen in the previous two months.

• Sales and earnings appear to be particular area of concern for small business owners. It is hard to blame businesses for feeling somewhat downbeat about the sales given the weak start of the year, and uneven performance of retail sales in the second quarter. Excluding sales of autos and parts, retail sales were down in two out of three months of the second quarter of 2015. Still, with the labor market showing steady improvement and gasoline prices still low, stronger consumer spending on goods and services should show up in the second half of the year.

• Increased stock market volatility in June and elevated global risks stemming from Greece and China may also have contributed to the souring in business sentiment. As these issues fade and attention returns to domestic fundamentals, small business optimism is likely to rebound.