The NFIB small business optimism index in July shows the index on the rise for the third month in a row. It is also the third month in which it registers above the 52-year average of 98. However, the increase is largely concentrated in two components which suggest that this is about month-to-month volatility. Small businesses are facing bewildering challenges due to unsettled tariff policies and problems in finding qualified workers even as they reduce open jobs. The improvement in perceptions could be fragile. If optimism is up a bit, the uncertainty index is up 8 points to 97 in July, the highest since 104 in January.

The NFIB small business optimism index up 1.7 points to 100.3 in July after 98.6 in June and compared to 93.7 in July 2024. July's reading is above the consensus of 98.9 in the Econoday survey of forecasters and is the highest since 100.7 in February.

The 10 index components are higher for 6, down for 2 and unchanged for 2 in July. Most of the increase is from a 14-point jump in expectations for the economy to improve to 36 percent and a 5-point rise in now is a good time to expand to 16 percent. Most of the remaining components show only small month-to-month movements of 1 or 2 points that are within normal changes. However, the current jobs component is down 3 points to 33 percent and is the lowest since 32 percent in December 2020.

In July, the single-most important problem cited by survey respondents is the quality of labor, up 5 points to 21 percent and the highest since 21 percent in August 2024. Plans to hire are not much changed at the time the number of open positions is declining. Small businesses appear once more at a disadvantage in competing for available labor.

The index is expected pretty flat at 98.9 in July from 98.6 in June as business sentiment remains dampened by uncertainty over tariffs and other government policies.

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.