The NFIB small business optimism index fell 2.5 points to 91.2 in August after 93.7 in July. The August reading is below the consensus of 93.6 in the Econoday survey of forecasters.

Concerned about inflation and the availability of qualified applicants for job openings, small businesses are less optimistic about future conditions. In addition, the political climate appears to be sapping confidence. The uncertainty index rose to 92 in August after 90 in July for its highest level since October 2020, right around the last presidential election.

The NFIB noted that the index remains below the 50-year average of 98 for the 32nd straight month.

In August, 8 of 10 index components were lower and two were higher. The largest downside moves were 9 points in expectations for higher sales to minus 18 percent to its lowest since March, 7 points to minus 37 percent for the expected earnings trend to its lowest since March 2010, and 6 points in expectations for the economy to improve to minus 13 percent where it walked back some but not all of the 18-point gain to minus 7 percent in July. Other components show a normal 1-3 point month-to-month fluctuation.

Among the NFIB survey respondents, 24 percent said that inflation is their single most important problem in August, followed by 21 percent who said that the quality of labor is the most important problem. Businesses may be worried that inflation isn't coming down fast enough to prompt the FOMC to cut rates as quickly or aggressively as they would like. There is also concern that labor market conditions may be favoring larger firms that can offer higher compensation in a still competitive market at least for those with the most sought-after skills.

August's consensus is no significant change at 93.6 versus 93.7 in a July report that, boosted by expectations for Federal Reserve rate cuts, was up 2.2 points from June for the highest level since February 2022.

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.