Sentiment on the part of small business owners declined in August, and based on the steep drop in interest rates and escalation of the trade war with China, you can't really blame business owners for becoming more cautious. Overall, the main index of sentiment dropped from 104.7 down to 103.1, which was 0.4 points lower than the 103.5 consensus expectation. In the commentary of the report, the NFIB noted that "in terms of real economic activity, August was a very good month," and went on to say that "the decline in the index was driven by weakened expectations for the future." One line that stood out from this month's report was the statement that "Pessimism is contagious, even when the real economy is doing well, expectations can be infected and turn sour. Those rooting for a recession are having a psychological impact in spite of a strong Main Street economy." While the statement isn't entirely inaccurate, we would note that the escalation of tariffs and rhetoric from the President certainly hasn't helped either.
Looking at the chart below, it has now been a full year since the NFIB Small Business Index made its peak for the cycle. While it isn't far from that level now, it has shown signs of rolling over in the last few months. If the lows from January are breached, depending on your political perspective, that would suggest that either it's more than just news headlines driving down sentiment or that the headlines actually won out.
In terms of the biggest problems facing small business owners, Labor Quality remains at the top of the list, rising from 26% to 27%. Behind Labor Quality, Taxes and Red Tape are tied for second at 14% each. It wasn't that long ago that these two problems topped the list and together totaled over 40%. Today, on a combined basis, the two would barely top Labor Quality as the biggest problem. In last week's ISM reports, we noted that the ISM Commodities surveys were increasingly showing fewer and fewer commodities rising in price. Today, that sentiment of benign inflation was further illustrated by the fact that only 1% of small business owners see inflation as their most important problem.
As mentioned above, Labor Quality remains the most important problem for small business owners these days, and in the entire history of the survey, it has never been a bigger problem. At 27%, the level is now comfortably above the 24% peak reached in 2000. While it only seems logical that labor costs would rise as Labor Quality becomes a bigger problem, to this point we have yet to see that play out, as only 9% of small business owners noted wage costs as their most important problem.