The NFIB small business optimism index is up 2.2 points to 93.7 in July after 91.5 in June, and above 91.9 in July 2023. The July reading is above the consensus of 91.7 in the Econoday survey of forecasters. The July level is the highest since 95.7 in February 2022, although it remains below the 50-year average of 98, the NFIB said. It seems likely that the July reading got a boost from anticipation of the FOMC cutting rates in September and higher hopes of a second cut later this year. That does not change that survey respondents are seeing greater uncertainty for their businesses in a changed but still contentious environment around the US presidential election.

The uncertainty index is sharply up to 90 in July after 82 in June and 80 in July 2023. This is the highest since 90 in November 2020. Small businesses continue to see two problems dominating the outlook. In July, 25 percent of owners reported inflation is their single most important problem, an increase from 21 percent in June. The second most important problem at 19 percent in July is said to be quality of labor, the same as in June.

In July, half of the index components are higher, two are lower and three are unchanged. The bulk of the upward move in the small business optimism index is in an 18-point jump for expectations for the economy to improve to minus 7 percent in July, the highest since minus 8 percent in March 2021. The next highest increases are 4 points for plans to increase inventories to 2 percent and current inventory too low to minus 4 percent, respectively. The remaining components exhibited no more than the usual one- or two-point month-to-month changes.

With 50 years of data, the small business optimism index has been below the historical average of 98 since January 2022. July's consensus is 91.7 versus 91.5 in a June report that showed mostly steady conditions but also an uptick in economic expectations.

The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of 10 seasonally adjusted components based on the following questions: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job openings, expected credit conditions, now a good time to expand, and earnings trend.

Small businesses are responsible for a majority of new job creation and the NFIB focuses on this sector of the economy. The direction of the health of small businesses can portend changes in the stock market - especially small caps.