Key Points

  • Small business optimism rebounded in August, driven by stronger sales expectations and improved profit outlooks, according to a monthly survey released Tuesday by the National Federation of Independent Business (NFIB).
  • Meanwhile, labor demand among small businesses continued to soften, consistent with the broader cooling trend across the economy. The report showed that the share of owners reporting difficulty filling positions fell to 32%, down 1 percentage point from July. Notably, the vacancy rate last dipped below 32% in July 2020 during the pandemic.
  • "Optimism rose slightly in August, with more owners reporting stronger sales expectations and improved earnings," said Bill Dunkelberg, NFIB Chief Economist. "Although owners mentioned some improvement in overall business conditions, labor quality remains the top issue on Main Street."

Deeper Dive

Another sign of cooling labor demand: NFIB data showed the share of small businesses reporting that they were hiring or trying to hire fell to 53%, down 4 percentage points from July. This change aligns with several recent employment indicators, reflecting a continued contraction in business hiring intentions.

The NFIB survey was released as the Bureau of Labor Statistics published preliminary benchmark revisions on Tuesday. The agency estimated that nonfarm payroll growth for the 12 months through March would be revised down sharply by 911,000 jobs, a decline of 0.6%. This record revision further confirms the view that the labor market had been previously overstated.

Additionally, data released by the Labor Department on Friday showed that overall U.S. hiring activity declined month-over-month in August, with the unemployment rate rising to 4.3%. Nonfarm payrolls increased by only 22,000 jobs that month, far below market expectations; the department also revised June data downward, showing a loss of 13,000 jobs that month, the first negative reading since December 2020.

These weak employment figures provide support for the Federal Reserve to begin cutting interest rates at its September 16-17 meeting. The federal funds rate target range currently stands at 4.25% to 4.5%, and market expectations widely anticipate a 25-basis-point cut at that time.

Consumers—whose spending accounts for about 70% of U.S. economic growth—also saw their outlook on the labor market dim in August. A New York Fed survey released Tuesday showed that consumers' perceived probability of losing their job over the next 12 months rose 0.1 percentage point to 14.5%, 0.5 percentage point above the 12-month moving average of 14%.

The same survey also showed that consumers' expected probability of finding a new job after losing their current one fell to 44.9% in August, down sharply by 5.8 percentage points from July. The New York Fed released this report, based on the August survey, on Tuesday.

Among small business owners, the pullback in hiring is just one manifestation of their cautious approach amid uncertain business prospects. Mark Valentino, head of commercial banking at Citizens, commented: "Many small business owners are navigating economic uncertainty with caution, reassessing expenses, hiring selectively, and managing debt in a disciplined manner."

Notably, despite weaker hiring intentions, small business owners' assessments of their own financial situation improved. NFIB data showed that 14% of small business owners rated their financial health as "excellent," up 1 percentage point from July; another 54% considered their financial situation "good," up 2 percentage points from July.