Small business optimism rises; so does recession risk.

The Bank of America, reports CNBC, has elevated its assessment of recession risk in the next twelve months.

“Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance,” Bank of America’s head of U.S. economics Michelle Meyer said in a note to clients Friday. 

Uncertainty around the U.S.-China trade war and a global economic slowdown have caused interest rates to tumble and weighed on the major stock averages in recent weeks. Last month’s jobs report showed a strong consumer, but business investment is low as investors and business owners juggle new tariffs and fiscal policy uncertainty.

And, while small business owners are aware of their risks, optimism increased in the last month, according to NFIB.

Optimism among small business owners bounced back in July as expectations for business conditions, real sales, and expansion made solid gains. The NFIB Small Business Optimism Index rose 1.4 points to 104.7, with seven of 10 components advancing, two falling, and one remaining unchanged. The Uncertainty Index fell 10 points, reversing a surge in June that reached the highest level since March 2017.

“While many are talking about a slowing economy and possible signs of a recession, the 3rd largest economy in the world continues to defy expectations, generating output, creating value, and expanding the economy,” said NFIB President and CEO Juanita D. Duggan.“Small business owners want to grow their operations, and the only thing stopping them is finding qualified workers.”

The NFIB economic trends report confirms the challenges posed by the tight labor market.

Job creation slowed in July, falling to an average addition of 0.12 workers per firm on average. Finding qualified workers is becoming increasingly difficult with a 46-year record high of 26 percent reporting finding qualified workers as their number one problem. Ten percent (down 2 points) reported increasing employment an average of 3.8 workers per firm and 7 percent (unchanged) reported reducing employment an average of 1.6 workers per firm (seasonally adjusted). The shortage of potential employees relative to the demand for them is slowing economic growth. The demand for workers has not faded and remains at record levels.

Sixty-three percent reported hiring or trying to hire (up 5 points), but 56 percent (89 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.

The inability to find qualified workers – workers with the credential required for the job – threatens economic growth.

“Contrary to the narrative about impending economic doom, the small business sector remains exceptional. This month’s index is a confirmation that small business owners remain very optimistic about the economy but are being hamstrung by not finding the workers they need,” said NFIB Chief Economist William Dunkelberg.

Meyers raises other concerns.

Meyer also said that three of five economic indicators that track business cycles — auto sales, industrial production and aggregate hours worked — are at levels reached right before previous recessions.

Uncertainty remains high.