The S&P 500’s selloff over the last week heading into today’s CPI print caused bullish sentiment to dip a little.  Compared to last week when 49% of respondents to the weekly AAII survey reported as bullish, this week only 44.7% reported as such. That is the weakest reading on optimism in a month, but remains well above the range of readings of most of the past year and a half.

The drop in bullishness was met with an increase in bearishness.  Bearish sentiment rose back above 25% for the first time since the week of July 14th.

In turn, the bull-bear spread moved lower this week, crossing back below 20 to 19.2. That is the lowest reading in four weeks as the spread continues to point toward an overall bullish tilt to investor sentiment.

In fact, this week marked the tenth in a row that bullish sentiment sat above its historical average while simultaneously bearish sentiment was below its historical average.  Looking across the past twenty years, there are not many examples of this sort of extended bullish sentiment streaks. In fact, only three other periods saw streaks of similar length. The most recent ended in May 2021 at 13 weeks. Before that, there was an identically long streak in the first quarter of 2012 and prior to that, you’d have to go all the way back to 2004 to find an example. In the 1990s through late 2000, such streaks were much more common.

Initial Jobless Claims have been back on the rise for the last two weeks with this week’s reading coming in at 248k versus estimates for 230k.  That is the most elevated reading since the first week of July and marks the largest week-over-week rise since the first week of June.

Before seasonal adjustment, claims totaled 225.6K, up roughly 20K from the previous week.  At those levels, claims are above those of the comparable week of last year and multiple pre-pandemic years. The past couple of weeks have seen particularly pronounced seasonal tailwinds which have historically ebbed this week and will again likely happen next week. However, those tailwinds are set to continue later this month into September when claims have typically reached an annual low point.

Lagged one week to initial claims, continuing claims came in lower than expected, dropping to 1.684 million from 1.7 million. That is slightly above the low from two weeks ago but does not yet disrupt the trend downward in continuing claims.

As for a state level breakdown of claims, in the heatmap below we show where continuing claims are most and least elevated as a share of the each state’s respective labor force.  As shown, the West Coast and Northeast are the two weakest regions of the country with the highest percentage of continuing claims.  Some states in the Southwest like Texas and New Mexico and the Midwest like Illinois and Minnesota also have pockets of weakness. Given various states have different unemployment insurance program eligibility requirements, benefit amounts, and program lengths, that is not necessarily to say these are the areas with the highest unemployment rates, but rather these are the places contributing the most to national claims counts.

In an earlier post, we noted the improvement to small business sentiment per the latest data from the NFIB.  The report also includes survey responses as to what small businesses perceive to be their biggest problems. The July report showed that small businesses have begun to take notice of easing inflation.  As shown below, throughout 2022 and into portions of 2023, inflation has ranked as the number one problem among small businesses.  But in July, Quality of Labor retook the number one spot as it had temporarily back in May.  Meanwhile, there has been a rise businesses saying that government requirements and red tape are their number one problem, tying cost of labor for the fourth most pressing issue.

Obviously, as it still occupies the number two spot, inflation remains a major problem. Even though it is a big improvement from 37% exactly one year ago, there continues to be 21% of firms that report inflation as their biggest problem. That is also well above any reading observed pre-pandemic.

On a combined basis, cost and quality of labor are the most commonly reported problem for small businesses at 33% of responses.  Unlike inflation which is hitting new lows, that is in the middle of the past few years’ range.

Historically, the NFIB survey has had sensitivities to politics with a bias towards being more optimistic during Republican administrations and vice versa.  Since the Biden Presidency began, government related problems have been on the backburner given that inflation has been playing a more pressing role.  However, there has been a steadily rising number of responses once again reporting government red tape or taxes as their biggest issues. That has come hand in hand with an increase in the survey’s Economic Policy Uncertainty Index which experienced a pronounced 4 point jump month over month in July.

Finally, we would note very few firms are reporting sales as their biggest problem. That is a significant disconnect from the index on actual sales changes which hit new lows in July.

Small business sentiment from the NFIB’s monthly survey rebounded in July with the headline index reading 91.9 versus expectations of it rising only 0.3 points to 91.3.  As shown below, small businesses are still reporting much weaker optimism than pre-pandemic or even in the first year of the pandemic, but sentiment has been making steady improvements in recent months.

In the table below, we break down each category of the NFIB’s survey. Again, the headline index remains historically low in the 14th percentile of readings. However, that is up from the 9th percentile last month.  Most other categories that contribute to the optimism index also rose month over month, albeit there were multiple that went unchanged. As a result of those moves, most categories remain at the low end of their historical ranges with a couple of exceptions: Plans to Increase Employment and Job Openings Hard to Fill. Each of those readings are in the 76th and 94th percentiles, respectively. However, as we noted in today’s Morning Lineup, overall this survey’s employment metrics have pointed to softening of labor market activity.

While several categories saw stronger readings in July, none rose more than Outlook for General Business conditions which jumped by 10 points month over month.  That is the second 10 point increase in a row which makes for the largest two month increase since May 2020. Although that reading showed an increase in optimism which coincides with continued improvement in the number of firms reporting that inflation pressures have eased, readings on small businesses actual operations were less rosy. Even though sales expectations were up, actual sales changes hit a new low of -13, the weakest since the spring of 2020, resulting in earnings changes to also drop.