Early this morning, the NFIB published their June report on small business sentiment. We discussed some details of the report in today's Morning Lineup, but to recap, the headline reading came in slightly lower and inline with expectations at 98.6.  As we often note, this survey is politically sensitive with a bias towards Republican administrations. As such, the index surged in the wake of the election, and after pulling back significantly earlier this year, it now remains in the middle of that range, which is also lower than it was for much of the first Trump administration.

In spite of the minor change to the headline number, there were some interesting findings throughout the rest of the report.  Apart from the headline index, there are parts of the report with less political sensitivity and more economic importance that are concerning. Two such areas with notable weakness were employment and capital expenditures. As shown below, the indices tracking actual changes to those areas of business have fallen sharply in recent months. For employment, current levels are at the weakest since August 2022, and the equivalent index for capital expenditures is down to the lowest reading since August 2022. While those new lows do indicate weakness, the declines could also be in part due to seasonality, with similar summer slumps for both indices observed in the past few years.

Holding the caveat of potential seasonality aside, the report offers additional insights in the form of what firms are spending their capex on.  As shown below, all categories have fallen significantly in the past few months, with particularly sharp declines in June.  The worst declines have been for vehicles and equipment, which are the two largest categories for capex. Vehicles—which is a tariff-impacted area—is tied with the spring of 2020 for the lowest reading of the past decade.  Also worth noting is that additional building or land spending is now at a record low in data going back to early 2014.

The report also includes a look at which problems firms claim to be their most important.  In another concerning data point for economic activity, 10% reported poor sales as their biggest problem in what was the highest reading for this category since March 2021. On the bright side, inflation continues to be a less important problem, as it was cited by a still high but rapidly declining 11% of respondents.

The drop in inflation as the most important problem gives room for other issues to come to the forefront. With tariff concerns front and center, it should come as no surprise that taxes are now the single biggest concern for small businesses, accounting for 19% of answers. When combined with government red tape, the 28% reading is the highest since November 2021.

As noted earlier, the NFIB historically tends to be sensitive to politics, favoring Republican administrations. That makes the turn higher in tax and red tape concerns more surprising. Other series in the report further indicate a turn away from those political biases, though. As shown below, when it comes to reasons for positive and negative expansion outlooks, fewer firms point to politics as a good reason to expand, and more point to that as a reason for a negative outlook.

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