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Small Business Optimism Takes A Pause

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by: Bespoke Investment Group
Summary

According to the NFIB, the headline small business optimism index in June fell from 105.0 down to 103.3.

Despite the decline, the headline reading was better than expected.

The pullback this month was most likely tied to the increased uncertainty created by the escalation in trade tensions between the US and China, as well as the threat of tariffs on imports from Mexico.

Small business optimism took a dip in June, ending a streak of four straight monthly increases. According to the NFIB, the headline small business optimism index fell from 105.0 down to 103.3. Despite the decline, the headline reading was better than expected. The key behind the pullback this month was most likely tied to the increased uncertainty created by the escalation in trade tensions between the US and China, as well as the threat of tariffs on imports from Mexico. As the NFIB’s President summed things up, “Last month, small business owners curbed spending, sales expectations and profits both fell and the outlook for expansion dampened.” That’s definitely not a sign of confidence, although we would note that with the trade war back on hold and the threatened tariffs on Mexican imports not materializing, that should set the stage for a rebound in sentiment next month.

With respect to the issues that small businesses see as their biggest problems, Quality of Labor remains the biggest problem, although the percentage of businesses that cited it as a problem last month fell from 25% down to 21%. Issues that took up the slack were Taxes (increased from 16% to 18%) and Cost of Labor (up to 10% from 8%). With regard to interest rates, only 2% of small businesses see interest rates as their biggest problem, so it’s not as though small businesses are having any trouble borrowing. Inflation is a very minor issue as well, as it too was only cited by 2% of small business owners.

Above we mentioned that the threat of higher tariffs was lifting levels of uncertainty, and that is reflected in the NFIB Uncertainty index, which saw its largest one-month increase since the 2016 election. At its current level of 87, the index has only been higher three times in the history of the index, and all three of those higher readings occurred during the period following Brexit and the 2016 election.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.