Among this morning's economic releases was the NFIB's Small Business Optimism index. The headline number came in above expectations, rising to 93.7 versus forecasts of an unchanged reading of 91.5. While that would still indicate that small business sentiment remains at the low end of its historical range, it did rise to the highest level in more than two years (February 2022).

Looking under the hood of this month's report, breadth across categories was solid with half of the inputs to the Optimism Index rising month over month, two falling, and the remaining three going unchanged.A handful of those gainers like Plans to Increase Inventories, Expected Real Sales Higher, and Expectations for the Economy to Improve were notable with top quartile monthly gains.While there were some big month-over-month moves, most indices remain at the low end of historical ranges.Additionally, there are some areas of key weakness. As we noted in today's Morning Lineup, employment metrics continue to weaken led lower this month by big drops in Compensation and Compensation Plans.
 

Again, Outlook for General Business Conditions stood out as the category with the largest monthly jump. As shown below, that reading went from a relatively low -25 up to -7.That 18-point jump ranks as the eight largest MoM increase on record with April 2020 being the last time the index rose by as much. Additionally, that leaves the index at the highest level since the last presidential election in November 2020.

It is worth noting that the NFIB data has typically been sensitive to politics (more evidence of this below) with the Outlook for General Business Conditions tending to be stronger during Republican administrations and lower during Democratic administrations. As such, the sharp increase in this index over the past couple of months was concurrent with Republicans gaining favor for winning the upcoming election; a move which has since reversed since mid-July meaning next month's NFIB release could see this index reverse lower as well.

One other area where political sensitivities have been observed is in the Economic Policy Uncertainty Index.Like the business outlook reading, in July this uncertainty index surged to the most elevated level since November 2020. As shown below, that sort of rise is nothing new. With some exceptions, every presidential election year (November to November, denoted by red lines below) has seen this index run higher.

Even though the business outlook has improved markedly, the percentage of firms reporting that it is a good time to expand hasn't benefited.The percentage reporting now as a good time to expand is low at only 5% and up only marginally month over month.As shown in the second chart below, economic conditions get most of the blame for the negative outlook with the political climate ranking second.

Looking back historically, in the chart below we show those same reasons for expansion outlook for those reporting negative or uncertain outlooks combined. Again, economic conditions are by far the most common response, but politics are elevated and rising significantly as election season continues to heat up.

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