Dive Brief:

• Pessimism among small businesses eased last month amid signs of slowing inflation and stronger economic growth, yet overall sentiment persisted below a 49-year average for the 19th straight month, the National Federation of Independent Business said Tuesday.
• Twenty-three percent of small business owners flagged labor quality as their top challenge, with 10% identifying labor costs as the No. 1 problem, the NFIB said. More than one out of five small businesses (21%) said inflation was their biggest headwind.
• “Inflation has eased slightly on Main Street, but difficulty hiring remains a top business concern,” NFIB Chief Economist Bill Dunkelberg said in a statement, adding that small businesses have a “dismal” view on future sales growth and business conditions.

Dive Insight:

With consumer sentiment improving and labor market strength exceeding expectations, private- and public-sector economists during the past several weeks have either trimmed the odds of recession or scuttled such forecasts altogether.

Goldman Sachs economists have reduced the probability of a downturn during the next 12 months to 20% from the 25% probability they set in June. In March, after three bank failures, they saw 35% odds that the economy will contract. Economists at JPMorgan and Bank of America last week withdrew predictions for recession this year.

Federal Reserve economists, after advising policymakers in March and June that a downturn was likely this year, brightened their forecast last month to slower growth, Fed Chair Jerome Powell said on July 26 after a two-day meeting of the central bank.

U.S. economic growth sped up last quarter even as the Fed raised interest rates at the fastest pace in four decades. Gross domestic product increased 2.4% compared with 2% during the first quarter, with stronger business fixed investment fueling much of the expansion.

“I do see us on the flight path to a soft landing we all hope for and that has proved quite elusive in the past,” Philadelphia Fed President Patrick Harker said Tuesday, referring to the possibility that the central bank’s most aggressive monetary tightening in four decades will not cause widespread layoffs and recession.

The Atlanta Fed said on Tuesday the economy will likely grow at a 4.1% annual rate during the third quarter, increasing its estimate from 3.9% on Aug. 1.

“Economic activity has grown at a moderate pace, and even as banks have been tightening their lending standards in response to higher interest rates, lending to businesses and households has continued to expand,” Fed Governor Michelle Bowman said Monday.

Despite higher borrowing costs, 25% of small businesses said they had met all their credit needs and 62% are not seeking a loan, the NFIB said. Only 3% of small business owners said they have not satisfied their borrowing needs.

Also, 55% of small business owners reported capital outlays during the past six months, an increase of two percentage points compared with June, the NFIB said.

The proportion of small business owners expecting business conditions to improve over the next six months rose 10 percentage points to a net negative 30%, the highest reading since August 2021 but still very negative, the NFIB said.

NFIB’s Dunkelberg said he expects a downturn.

“If you look at the 50 year chart of the index, you will see that our current numbers and numbers we've seen for the last 19 months are all very typical of what we've seen for the recession periods for the last 50 years,” he said Tuesday in an interview with Bloomberg Television.

“So the index is definitely in a bad place in terms of looking forward to where the economy is going to go,” he said. “The level of economic activity on Main Street is clearly slow.”