NEW NFIB SURVEY: Small Business Optimism Remains Steady in June

The NFIB Small Business Optimism Index edged down slightly to 98.6 in June, primarily driven by a notable increase in reported excess inventories, while the Uncertainty Index decreased. Taxes re-emerged as the top problem for small businesses at 19%, the highest since July 2021, even as inflation concerns eased to their lowest level since September 2021. Despite a perceived deterioration in overall business health, small businesses reported a significant increase in nominal sales and continued plans to raise prices, indicating a mixed economic outlook with persistent labor cost challenges.

Analysis

The NFIB Small Business Optimism Index for June showed a marginal decline of 0.2 points to 98.6, a reading that remains slightly above its historical average but masks significant underlying crosscurrents. The primary driver of the headline weakness was a substantial build-up in inventories, with the net percentage of owners viewing stocks as 'too low' falling six points to a net negative 5%, suggesting a potential slowdown in final demand. This caution is reinforced by a six-point drop in capital outlays over the past six months to 50%, the lowest level since August 2020, and a deterioration in owners' assessment of their own business health. In contrast, inflationary pressures appear to be bifurcating; while owners citing inflation as their top problem fell to an 11% low, the net percentage raising selling prices increased four points to 29%, and plans to raise prices hit their highest reading since March of the prior year. This pricing power is likely a response to persistent labor cost pressures, as a net 33% of owners reported raising compensation, the largest monthly increase since January 2020. The most prominent concern has now shifted to taxes, which 19% of owners cited as their single most important problem, a level not seen since July 2021.

Key Decisions for Investors

• The significant inventory build and sharp decline in capital outlays to a multi-year low are leading indicators of a potential economic slowdown, warranting a cautious stance on cyclical stocks dependent on small business investment.
• Monitor the divergence between easing inflation concerns and rising price-setting behavior; continued wage pressures and price hikes could create sticky underlying inflation, potentially complicating the outlook for monetary policy.
• The rebound in nominal sales, despite falling real sales expectations, suggests price increases are masking weaker volumes, a key risk factor for consumer discretionary and retail sector performance.
• Note the elevation of taxes to the primary business concern, as this could signal a shift in the political and regulatory landscape affecting corporate profitability and fiscal policy.