U.S. small business confidence likely to gain moderately by end of this year

The U.S. NFIB’s small business optimism index dropped in August, in contrast to consensus view of a rise in the index. The small business optimism index fell 0.2 points to 94.4. The drop in August erases the moderate rebound seen in July, and kept the index over three points below the historical average. The details of the report came in mixed, with four of the ten subcomponents declining, five rising and one remaining the same.

The net share of companies anticipating the economy to rebound recorded the biggest disappointment, with the index dropping seven points to -12 percent. Moreover, the share of companies expecting higher sales in the next six months registered a two-point pullback, falling back into negative territory, noted TD Economics in a research note.

Expansion plans continued to be weak. About 38 percent of business owners cite the political scenario as a reason to not expand. Meanwhile, employment sub-indicators came in mixed. Small businesses continue to face challenges in drawing qualified employees with 30 percent of companies citing ‘positions not able to fill’. This is the highest reading in ten years and indicates towards an increasingly tight labor market in the country.

Meanwhile, the share of companies planning to boost employment dropped three points to 9 percent. The share of companies raising and planning to increase worker compensation continues to be near post-recession highs on a trend basis.

Small business sentiment in the country continues to be volatile on a sequential basis, and a modest pullback after four straight monthly gains was not unexpected. The fall in sentiment brings the reading closer to the levels seen in June; however, it does not totally discount the gains that have taken place in the last few months, said TD Economics. Sentiment still remains nearly two points higher as compared to the cyclical low recorded in March.

However, the NFIB surveys continue to indicate towards vulnerabilities in the U.S. expansion, as the share of companies registering higher earnings has trended down, along with the ones anticipating higher real sales ahead, stated TD Economics. Moreover, the political scenario around the election is one of the main reasons being cited as for holding back expansion plans. Political unease might deepen further as elections get closer.

“The tug of war between political uncertainty and a domestic economy that is still on a solid footing – underpinned by a strong U.S. consumer, continued job and wage gains – is likely to yield only moderate gains in confidence by the year's end”, added TD Economics.