Small business optimism increased more than expected in October, rising from 101.8 up to 102.4 compared to economist expectations for an increase to just 102.0.  After a sharp drop from its high in August 2018, small business sentiment hasn’t rebounded much off its lows, but it is at least showing some sign of optimism.

We have pointed out in the past how drops in sentiment among small business owners have typically peaked well in advance of recessions, and looking at a long-term chart, every prior recession was preceded by a peak in this indicator.  While that’s true, we would also note that there are also a number of periods early and mid-cycle where sentiment also declined by similar amounts but rebounded to make new highs.  Therefore, we wouldn’t put too much into the recent decline as a high confidence indicator of an impending recession.

With regards to the biggest issues small business owners are facing, labor continues to be a big problem. In this month’s survey, one in four small business owners cited Quality of Labor as the most important problem, which was up from 23% last month.  Behind Labor Quality, Taxes, Red Tape, Cost of Labor, and Competition were all cited by at least 10% of small business owners.  Way on down the list are Inflation and Interest Rates which were cited by a total of only 3% of small business owners.

Below we show the historical percentage of small business owners who cited Labor Quality as their number one problem.  Back in August, this reading hit a record high of 27%, but at 25%, it still sits at extraordinarily high levels.  While labor costs have been held in check to this point, never before have employers had so much trouble finding qualified workers.  Sign up for Bespoke’s “2020” special and get our upcoming Bespoke Report 2020 Market Outlook and Investor Toolkit.

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