US small business sentiment near 2-1/2-year high

WASHINGTON (Reuters) - U.S. small-business confidence jumped to the highest level in nearly 2-1/2 years in July, another indication that financial market fears of a recession following last month's increase in the unemployment rate were likely overblown.

The National Federation of Independent Business (NFIB) said on Tuesday its Small Business Optimism Index rose 2.2 points to 93.7 last month, the highest reading since February 2022.

Though businesses continued to worry about inflation, fewer reported raising worker compensation and average selling prices. This bodes well for the inflation outlook. More planned to increase inventory in the coming months, which could provide a boost to gross domestic product.

The report joined a survey last week from the Institute for Supply Management showing a rebound in its nonmanufacturing PMI in easing concerns that the economy was either in recession or on the cusp of a downturn that was triggered by a surge in the unemployment rate to near a three-year high of 4.3% in July.

Twenty-five percent of owners reported that inflation was their single most important problem in operating their business, up 4 points from June. That, together with policy uncertainty ahead of the presidential election in November, contributed to keeping the NFIB index below the 50-year average of 98 for the 31st consecutive month.

"Owners are heading towards unpredictable months ahead, not knowing how future economic conditions or government policies will impact them," said NFIB chief economist Bill Dunkelberg.

Nevertheless, the inflation picture is improving.

A net 33% of owners reported raising employee compensation. That was the lowest reading since April 2021 and was down 5 points from June. That aligns with a recent slowdown in wage growth. The share of owners increasing average selling prices fell 5 percentage points to 22%, which fits in with ebbing price pressures.

A net 24% planned price hikes, the smallest share since April 2023, down 2 percentage points from June.

Cooling inflation and an easing labor market have led financial markets and economists to conclude that the Federal Reserve will start cutting interest rates in September. A 50 basis points rate cut has not been ruled out, especially given that the unemployment rate has risen for four straight months.

Business owners also anticipated high sales, though the share remained at depressed levels.

A net 2% planned inventory investment in the months ahead, up 4 percentage points from June. The last time inventory investment plans were positive was in October 2022.

Though the labor market is slowing, workers remain in short supply, especially in the construction, transportation and retail industries. The NFIB noted that job openings in construction were up 4 points from June and 55% of firms had a vacancy they could not fill.

Thirty-eight percent of all owners reported job openings they could not fill last month, up 1 point from June.

(Reporting by Lucia Mutikani; editing by Jonathan Oatis)