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US small business optimism reaches highest level since 2007: NFIB

H.S. Borji
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US small business sentiment increased in May for the third consecutive month, driven by sales and business expectations.

The optimism index, courtesy of the National Federation of Independent Business, rose 1.4 points in May to 96.6, the highest level since September 2007. Economists forecast an increase to 96.1.

Small businesses are the backbone of the US economy, making the NFIB releases noteworthy. More than 99 percent of all US businesses employ fewer than 500 workers. Businesses with less than 20 workers make up nearly 90 percent of all employer establishments.

The May report was based on a survey of 678 small businesses taken from the NFIB’s membership.

Despite the multi-year high, the index suggests optimism is still well below normal levels during an economic expansion. The index has intermittently posted similar advances throughout the recovery, but those gains didn’t pan out, according to the NFIB.

So-called soft components such as sales and business expectations led the increase in May, while the four components most closely related to gross domestic product and employment collectively declined. These figures suggest businesses are still hesitant about increasing payrolls and investing in an uncertain economic climate.

“[T]he four components most closely related to GDP and employment growth (job openings, job creation plans, inventory and capital spending plans) collectively fell 1 point in May,” said NFIB chief economist Bill Dunkelberg in a press release. “So the entire gain in optimism was driven by soft components such as expectations about sales and business conditions.”

Dunkelberg also added that, “With prices being raised more frequently in response to rising labor and higher energy costs it is clear that small businesses are unwilling to invest in an uncertain future.”

Seasonally adjusted, 11 percent of small business owners said they added an average of 3 workers per firm over the past few months. More than three-quarters of owners made no change in employment, NFIB data showed. More than half of owners hired or tried to hire in the last three months and 46 percent said they found few or no qualified applicants for vacant positions.

The US economy added 217,000 nonfarm payrolls last month, down from April’s pace of 282,000. The unemployment rate held steady at 6.3 percent, the Labor Department reported last Friday.

Job creation has rebounded strongly from the winter slowdown, which weighed heavily on US recovery The US economy contracted 1 percent annually in the first quarter. That was the first time the US economy contracted since 2011.

Steady improvements in profits among small businesses boosted employee earnings, albeit very slightly. Earning trends improved three points to a net negative 17 percent, as rising labour costs continued to pressure wage growth. Average earnings increased 0.2 percent in May, after no change the prior month, the Labor Department reported last week. Year-on-year, average earnings were up 2.1 percent.

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