Small-Business Sentiment Hits High For the Year

Small-business optimism touched the best level of the year in July amid rising expectations that the economy will pick up, though difficulty hiring and reluctance to meaningfully step up investment spending continues to kept sentiment in check. 

The National Federation of Independent Business's small-business optimism index inched up to 94.6 last month from 94.5 in June, marking the fourth straight month of improvement. Still, the gauge remains below the its historical average of 98. 

The reading matched expectations; economists surveyed by The Wall Street Journal expected 94.6. 

The trade group's survey, based on about 1,700 respondents in July, is a monthly snapshot of America's small-business sector. The smallest U.S. businesses are home to most American jobs and account for roughly half of economic output. Many economists look to the report for clues on hiring, wage and business investment trends in the broader economy, and for a read on domestic demand. 

In July, four of the report's 10 subindexes rose, paced by a brighter outlook going six months out. Though many small-business owners continued to express concern that business will weaken in the coming months, a gauge of future conditions hit a year high in July. 

The sentiment reading suggests some owners see recently softer sales as temporary, though ongoing difficulty hiring and apprehension over business investment help explain why confidence remains below the longer-run trend. Some 53% of respondents said they hired or tried to hire in July, but most of them -- 46% -- reported few or no qualified applicants. Slightly more employers versus June signaled that they would pick up hiring in the next three months. 

The NFIB has been reporting for months that small businesses are having difficulty locating the right workers, a sign of a tightening labor market. In July, small firms slowed hiring, payroll provider ADP said it its report last week. But trouble finding the right workers hasn't yet translated into meaningfully higher pay. The NFIB said about a quarter of owners last month raised worker compensation, which includes wages and benefits, up two points from June but down two points from May. The net percent planning to increase compensation rose one point to a net 15%, according to the report. 

Meanwhile, a higher number of firms -- 59%, up modestly from June but down three points from a year earlier -- reported capital outlays. Business investment has been a weak spot in the broader economy, thanks largely to the oil collapse and countering robust consumer spending. The NFIB said its measure of capital spending is consistent with reports of anemic growth in gross domestic product this year. 

Looking ahead, the percent of owners planning capital investments in the next three to six months fell one point to 25%, "a high reading in this expansion, but historically weak," according the group, which said the small business sector remains in "maintenance mode," where "spending will continue to stay in place but not expand." 

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com