With sentiment improving and GDP growth rate picking up in the second quarter, investors and economists alike are looking for anything to confirm or refute the upswing in the economy. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index technically rose 0.7 points to 95.7 in July.

What should stand out in this latest report is that the higher readings among the index components were not universal. The 10 index components were little changed other than outlook for expansion and business conditions, which accounted for most of the small gain in the index.

Some problems that these businesses are confronting are mediocre capital spending reports, large inventories and deteriorating sales trends. As long as these problems persist, the small business portion of the economy will continue to not be able to pull its weight.

We have included a brief snippet on each reading inside the index cited by the NFIB. A review of the July indicators is as follows:

• Labor Markets – Business owners increased employment by an average of 0.01 workers per firm, marking the 10th positive month in a row. Out of all the owners reporting, 75% made no net change in employment, 53% hired or tried to hire in the last three months, and 42% reported that there were few or no qualified applicants.
• Job Creation – Job creation plans continued to strengthen and rose 1 point to a seasonally adjusted net 13%. Actual job creation remained positive.
• Sales – The seasonally adjusted net percent of owners reporting higher nominal sales fell 1 point to a reading of 3%, although still one of the very best readings since 2007.
• Earnings and Wages – Earnings trends were unchanged at a net negative 18%, one of the best readings since 2007. Rising labor costs are keeping pressure on earnings, but there appears to be an improvement in profit trends in place.
• Credit Markets – Out of the owners reporting, 6% said their credit needs were not met. This remains unchanged and only 2 points above the record low. Thirty percent of owners reported all credit needs met, and 52% explicitly said they did not want a loan.
• Inventories – The pace of inventory reduction was steady, with a seasonally adjusted net negative 3% from all owners reporting growth in inventories. More companies now are reducing inventory rather than building their stocks.
• Inflation – 12% of owners reported reducing their average selling prices, and 25% reported price increases. Seasonally adjusted, the net percent of owners raising selling prices was a net 14%, unchanged from June and 15% higher than December.

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