NFIB’s Small Business Optimism Index fell 1.8 points to 98.8 in July, near the survey’s historical average. Overall, 4 of the 10 Index components improved, 5 declined, and 1 was unchanged. The NFIB Uncertainty Index increased 7 points to 88. Reports of expected better business conditions in the next six months declined 14 points to a net 25%. Owners continue to temper their expectations of future economic conditions as the COVID-19 public health crisis is expected to continue.

“This summer has been challenging for many small business owners who are working hard to keep their doors open and remain in business,” said NFIB’s Chief Economist Bill Dunkelberg. “Small business represents nearly half of the GDP and this month we saw a dip in optimism. There is still plenty of work to be done to get businesses back to pre-crisis numbers.”

Other key findings include:

- Real sales expectations in the next 3 months decreased 8 points to a net 5%.
- The percent of owners thinking it’s a good time to expand decreased 2 points to 11% of owners.
- Earnings trends over the past 3 months improved 3 points to a net negative 32%.
- Job creation plans increased 2 points to a net 18%.

As reported last week in NFIB’s jobs report, a seasonally adjusted net 18% plan to create new jobs in the next 3 months, up 2 points from June and 17 percentage points above April. Owners are interested in hiring but many workers may not be ready to return.

Up one point from last month, 49% of owners reported capital outlays in the last six months. Of those making expenditures, 33% reported spending on new equipment, 21% acquired vehicles, and 13% improved or expanded facilities. Five percent acquired new buildings or land for expansion and 10% spent money for new fixtures and furniture. Twenty-six percent of owners are planning capital outlays in the next few months.

A net negative 28% of all owners (seasonally adjusted) reported higher nominal sales in the past 3 months. Even with states reopening, sales are often lower due to business restrictions, social distancing requirements, and a still-reduced willingness of consumers to go out and mingle with the general population.

The net percent of owners reporting inventory increases improved 3 points to a net negative 11%. The net percent of owners viewing current inventory stocks as “too low” was unchanged from June at 1%. The net percent of owners planning to expand inventory holdings decreased from June by 3 points to a net 4%. This reading is the third-highest quarterly reading since 2007.

The net percent of owners raising average selling prices rose 3 points to a net negative 2% (seasonally adjusted). Not seasonally adjusted, 16% reported lower average selling prices and 15% reported higher average prices. Price hikes were most frequent in retail (14% higher, 22% lower) and wholesale (14% higher, 15% lower). Seasonally adjusted, a net 13% plan price hikes (up 1 point).

A net 15% reported raising compensation (seasonally adjusted), remaining well below the 36% reading in February before COVID-19 policies were implemented in March. A net 13% plan to do so in the coming months. Eight percent cited labor costs as their top problem, unchanged from June’s reading.

Twenty-one percent of owners selected “finding qualified labor” as their top business problem, with 37% in construction. The COVID-19 disruption for millions of workers did not change the skills of the existing workforce.

The frequency of reports of positive profit trends rose 3 points to a net negative 32% reporting quarter on quarter profit improvement. The major cause of profit weakness is weak sales.

Only 3% of owners reported that all their borrowing needs were not satisfied and 35% reported all their credit needs were met. Fifty-one percent said they were not interested in a loan. A net 2% reported their last loan was harder to get than in previous attempts.

LABOR MARKETS
Firms reduced employment by -0.06 workers per firm on average over the past few months. Seven percent (up 1 point) reported increasing employment an average of 3.8 workers per firm and 18 percent (down 2 points) reported reducing employment an average of 2.3 workers per firm (seasonally adjusted). A seasonally-adjusted net 18 percent plan to create new jobs in the next three months, up 2 points from June and 17 percentage points above April, an unprecedented recovery from a record June decline. Thirty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from June’s strong number. Twenty-seven percent have openings for skilled workers (unchanged) and 11 percent have openings for unskilled labor (unchanged). Twenty-five percent of owners reported few qualified applicants for their open positions (up 2 points) and 19 percent reported none (down 1 point). Forty-four percent (86 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill, up 1 point.

CAPITAL SPENDING
Forty-nine percent reported capital outlays in the last 6 months, up 1 point from June. Unfortunately, this is 14 percentage points below January’s level. January, February, and March were all at 60 percent or better. May, June, and July all posted readings below 50 percent, a reduced contribution to GDP growth. Of those making expenditures, 33 percent reported spending on new equipment (up 1 point), 21 percent acquired vehicles (up 3 points), and 13 percent improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (unchanged), and 10 percent spent money for new fixtures and furniture (up 1 point). Twenty-six percent plan capital outlays in the next few months, up 4 points from June and 8 points from April. Plans are trending up but remain at recession levels. A solid improvement in capital investment is essential to support a sustained growth recovery, and Main Street is a critical player, accounting for about half of the economy. Currently, the outlook for sales growth is not strong and uncertainty levels are high, both deterrents to making investments for the future.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 15 percent reported raising compensation (up 1 point). A net 13 percent plan to do so in the coming months, up 1 point from June. The frequency of reports of positive profit trends rose 3 points to a net negative 32 percent reporting quarter on quarter profit improvement. The major cause of profit weakness is weak sales. Among owners reporting weaker profits, 60 percent blamed weak sales, 7 percent cited price changes, 3 percent cited labor costs, and 3 percent cited materials costs. For owners reporting higher profits, 62 percent credited sales volumes.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (unchanged). Thirty-five percent reported all credit needs met (up 1 point) and 51 percent said they were not interested in a loan (down 3 points). A net 2 percent reported their last loan was harder to get than in previous attempts (down 1 point). Overall, access to capital is not a serious problem, likely due to the popularity of the Paycheck Protection Program that most small employers have accessed. One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 9 percent, unchanged from June. Twenty-six percent of all owners reported borrowing on a regular basis (down 1 point). The average rate paid on short maturity loans was down 0.4 points at 4.1 percent. Historically, loans have never been cheaper.

SALES AND INVENTORIES
A net negative 28 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 3 points from June but a terrible number. Even with states re-opening, sales are often lower due to business restrictions, social distancing requirements, and a still-reduced willingness of consumers to go out and mingle with the general population. The net percent of owners expecting higher real sales volumes decreased 8 points to a net 5 percent of owners.

The net percent of owners reporting inventory increases improved 3 points to a net negative 11 percent. Inventory levels are surprisingly low. The net percent of owners viewing current inventory stocks as “too low” was unchanged from June at 1 percent. The surge in consumer spending in May and June has left shelves a bit too empty for some and replenishment is compromised by supply chain problems. Overall, a very tight inventory environment. The net percent of owners planning to expand inventory holdings decreased from June by 3 points to a net 4 percent. However, the 4 percent reading is the third highest quarterly reading since 2007, a very positive number.

INFLATION
The net percent of owners raising average selling prices rose 3 points to a net negative 2 percent, seasonally adjusted. Unadjusted, 16 percent (down 2 points) reported lower average selling prices and 15 percent (unchanged) reported higher average prices. Price hikes were most frequent in retail (14 percent higher, 22 percent lower) and wholesale (14 percent higher, 15 percent lower). Seasonally adjusted, a net 13 percent plan price hikes (up 1 point).

COMMENTARY
Who knew? January and February added two solid months to an already record-long expansion, but that was abruptly terminated by Covid-19 and the government policies targeted at slowing the spread of the virus. Closing stores and sheltering-in-place resulted in a 13 percent decline in consumer spending in April. Then, whipsaw, spending rose 16 percent in May. Lower income consumers increased their spending to near pre-Covidlevels, but higher income consumers are holding back. Consumers are being supported with individual stimulus checks and special unemployment insurance benefits, but they can’t get it all spent, raising the saving rate out of income to a record 33 percent in April, then 23 percent the following month (usually 4%-6%). Putting three months together (second quarter), economic output fell at a -33 percent annual rate, guaranteeing a huge positive growth rate next quarter (from very depressed levels). Overall, spending remains well below pre-Covid levels and will probably not reach them this year.

Forecasts put third quarter GDP growth at a double-digit level with slightly lower unemployment rates and positive job growth. Much will depend on the terms of the new Congressional bailout, consumer’s reaction to it, and their general comfort with going back to work and going shopping.