Small business optimism rises in July despite labor and inflation challenges

Optimism among small business owners improved in July, according to the most recent NFIB Small Business Optimism Index. In July, the index rose 1.7 points from June to 100.3. This figure is slightly above the 52-year average of 98. This increase is largely driven by owners’ expectations for better business conditions and expansion opportunities.

At the same time, uncertainty remains high, with the NFIB’s Uncertainty Index rising eight points to 97. This suggests that while owners feel cautiously confident, they’re navigating an unpredictable economic environment.

More owners report strong business health

Business owners are reporting healthier operations overall. In July, 13% rated their business as excellent (up five points), and 52% said good (up three points). Those reporting fair or poor health declined, revealing modest improvement in the overall business climate.

Despite these gains, challenges remain. Eleven percent of owners cited poor sales as their top problem, the highest level since February 2021, signaling that revenue growth is still uneven.

Owners are planning for growth and expansion

Owners’ outlook for the future shows cautious optimism. The net percentage of owners expecting better business conditions increased 14 points to 36%, which is above the historical average. Sixteen percent said it’s a good time to expand (up five points).

Investment plans remain steady, but below historic norms: 22% of owners are making significant capital outlays in the next six months, slightly up from June but down seven points from the long-term average of 29%. Over the past six months, 55% reported significant capital expenditures on: equipment (38%), vehicles (23%), facilities (15%), fixtures or furniture (12%) and buildings and land (5%). These figures show that while businesses are investing in growth, many remain cautious in the face of economic uncertainty.

Labor and hiring challenges hinder business growth

Labor remains a top concern. Only 9% of small business owners cited labor costs as their primary challenge, a one-point decrease from June. Thirty-three percent of small business owners reported unfilled job vacancies in July, down slightly from June but still above the historical average of 25%. Of those hiring, 84% said they had few or no qualified applicants, highlighting ongoing hiring challenges.

Compensation trends reveal restraint, with only 27% reporting they raised pay in July (down six points) and just 17% planning increases in the next three months (down two points). These constraints could make attracting and retaining talent more difficult as competition for skilled workers remains high.

Sales, profits, and inflation trends

Profits remain under pressure, with a net negative 22% reporting positive profit trends. Owners reporting lower profits pointed to weaker sales (34%), rising material costs (13%), labor costs (11%) and price changes for their products or services (9%).

Sales volumes are improving only slightly: the net percentage expecting higher real sales fell one point to 6% but remains above the historical average. Inflation also remains a challenge, with 28% planning to raise prices, signaling that many small businesses are still struggling with higher operating costs.

Inventory remains tight for many owners

Inventory management is another challenge. The net percentage of owners reporting inventory gains stayed negative at 8%, and 3% felt their inventory was too low, a slight increase from June. While some businesses are maintaining adequate stock, others are struggling to meet consumer demand, which could impact sales and profit margins.

Cautious optimism amid challenges

While small business optimism is on the rise, labor shortages, persistent inflation and uneven sales growth continue to shape owner expectations. Many are cautiously investing, but the high level of uncertainty underscores the importance of strategic decision-making.