Earlier this morning, the National Federation of Independent Businesses, or NFIB, published its latest report on small business sentiment for May.  The headline number continued its rebound off of the 11-year low of 88.5 set in March, rising to 90.5.  While still historically muted, this month’s reading was the highest level of small business sentiment since last December.
 
Breadth in the report was decent with five inputs of the headline number moving higher, two going unchanged, and another three falling month over month.  As with the main reading, most of these indices are historically low despite recent improvements.  In fact, most of these categories currently sit in the bottom decile of their historical ranges with the few notable exceptions being a couple of labor-related indices.  For example, plans to increase employment rose significantly to move back into the 63rd percentile while the percentage of respondents reporting job openings as hard to fill is still very high in the 93rd percentile.  However, as we discussed in today’s Morning Lineup,  the overall trends are not particularly favorable across all labor categories included in the report.The report continues to show that there is an overwhelming share of businesses that hold a pessimistic view of the economy. Granted, that index picked up to -30 in May which matches last July for the joint highest readings since August 2021. Of course, that is still a very low reading ranking in the bottom 7% of readings historically, and as such, the percentage of businesses that view the current time as a good time to expand is low at 4%.
 
The NFIB breaks out reasons for businesses’ expansion outlook.  As shown below, by far the most common reason for a negative expansion outlook is economic conditions albeit that has continued to trend lower over the past couple of years.  The next biggest reason is the political climate (discussed further below) then financials and interest rates.
 
In addition to being the third most common reason for a negative expansion outlook, we would also note that the percentage of firms reporting financials and interest rates as their biggest issue has risen to a new high of 6%.  While that is far from the most common problem (issues like labor costs and quality, government red tape, taxes, and inflation account for a massively larger portion of response), it is the highest amount since 2010.
 
The one index that stood out the most in this month’s report had to do with inventories.   A net 6% of small businesses reported drawing down inventory levels over the past three months.  While that does not set any new low for the series, it is another reading at the lower end of the historical range. As for the reason so many businesses are working down inventory levels, the net share of respondents reporting that current inventory levels are too low versus too high hit a record low. In other words, a record number of respondents reported that inventories are too high.  Perhaps an example of the bullwhip effect, that comes 2.5 years after the index’s record high.
 
Finally, we would note that this month also saw a significant pickup in the NFIB’s Economic Policy Uncertainty Index.  As we discussed in the Morning Lineup, one factor working against the usefulness of the NFIB survey is a sensitivity to politics.  For example, looking at the aforementioned expansion outlook index, politics are a historically popular reason for negativity with readings that were much more elevated during Democratic administrations versus Republican administrations.  As could be expected, the Economic Policy Uncertainty Index has not been immune to this trend.

As shown below, the uncertainty index tracking apprehension of small businesses towards economic policy typically rises in the 12 months before a presidential election and has seen particularly large jumps over the past few elections.  This time around, though, the increase has been even larger than normal with a 20-point jump since November. Compared to the same months in prior election cycles, it has been a record increase, and assuming it follows the pattern of the past three election cycles, it would not be surprising to see it continue to rise through Election Day.
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