U.S. small business confidence increased to a five-month high in May with owners expecting a solid improvement in profits, which bodes well for the economy's prospects in the months ahead.
The National Federation of Independent Business said on Tuesday its Small Business Optimism Index rose 1.4 points to 98.3, the highest reading since December. About 616 businesses took part in the survey.
The upbeat confidence survey added to robust May employment and automobile sales reports that have suggested the economy was gaining momentum after a slow start to the second quarter. Gross domestic product contracted in the first quarter.
"It appears that the small business sector has finally attained a normal level of activity which will hopefully keep the economy moving forward," the NFIB said in a statement.
Eight of the index's 10 components rose last month. Sales expectations, which fell in April, declined again. Owners' views about spending on capital weakened slightly, while their attitudes toward increasing inventories were unchanged.
Despite the gloom about sales, business owners were quite bullish about earnings. A gauge of profits surged nine points in May, accounting for more than half of the gain in the index.
There was a solid increase in the number of owners who said now was a good time to expand and a marginal rise in those saying inventories were too low. More owners said they were experiencing difficulties finding workers for open positions.
Over 80 percent of those hiring or trying to hire in May reported few or no qualified applicants, a sign that the labor market is tightening rapidly.
The survey showed that while inflation pressures are mild, they have potential to pick up. The share of owners raising prices rose four points to 6 percent in May. About 17 percent of owners plan price hikes over the next few months.
On the other hand, businesses are raising wages for workers. Twenty-five percent of owners said they had increased compensation. About 14 percent plan to raise compensation in the coming months.
"The reported gains in compensation are still in the range typical of an economy with reasonable growth, and labor market conditions are tightening, which will put further upward pressure on compensation," the NFIB said.