The sentiment among U.S. small businesses improved for the second consecutive month in May, reaching its highest level this year. However, business owners' perceptions of uncertainty spiked to a three-and-a-half-year high in anticipation of the general election, while inflation continued to be their primary concern, according to a survey released Tuesday by the National Federation of Independent Business (NFIB).
The NFIB Small Business Optimism Index increased by 0.8 points to 90.5, still falling short of the historical average of 98 for the 29th consecutive month. Economists had anticipated a score of 89.8.
The index had plummeted to 88.5 in March, marking its lowest point since December 2012.
The survey's Uncertainty Index surged nine points to 85, the highest level since November 2020. "Small businesses, which contribute over 40 percent of GDP and employment, are a pivotal part of the economy," noted NFIB Chief Economist Bill Dunkelberg. "Despite this, for 29 months straight, small business owners have shown historically low optimism, with their future business outlook at its worst in 50 years." He added, "Small business owners need relief as inflation remains stubbornly high on Main Street."
According to the NFIB survey, 22 percent of owners cited inflation as their most pressing issue, unchanged from April. Inflation continued to be the top concern among business owners.
The percentage of respondents planning to increase prices rose to a net 28 percent from 26 percent in April. Similarly, 25 percent of owners reported raising average selling prices, unchanged from the previous month. Additionally, small business hiring plans saw a boost in May, with 15 percent of businesses planning to expand their workforce, the highest level this year, compared to 12 percent in April.
Financing emerged as a primary concern for 6 percent of owners in May, up two points from April. This marks the highest level of concern regarding financing since June 2010, as per NFIB's data.
Small business owners showed cautiousness regarding compensation packages, with 37 percent planning to increase pay in May, a slight decline from 38 percent in April.
The Federal Reserve is anticipated to announce its latest interest rate decision on Wednesday. The Federal Open Market Committee (FOMC), led by Chair Jerome Powell, is expected to maintain the benchmark interest rate at 5.50 percent.
The stronger-than-expected growth in payroll employment and the rise in average earnings detailed in last Friday's jobs report have dampened hopes for an interest rate cut in September.
The robust labor market and wage growth are likely to make policymakers more cautious about easing policies. Economists still foresee at least one interest rate cut by the end of the year.
The NFIB's monthly jobs report highlighted that a net 18 percent of businesses plan to boost compensation in the next three months, down three points from April and the lowest reading since March 2021. Additionally, 42 percent of owners reported having job openings they could not fill during the current period.