U.S. Small Business Expecting Better Business Conditions Hits Record Low

The NFIB Small Business Optimism Index fell 0.1 points in May to 93.1 vs 93.2 prior, well below the 47-year historical average reading of 98.6. Owners expecting better business conditions over the next 6 months declined 19 points to a net 8%. This sub index has fallen every month since January to hit a record low.

“Small business owners are struggling to deal with inflation pressures,” said NFIB Chief Economist Bill Dunkelberg. “The labor supply is not responding strongly to small businesses’ high wage offers and the impact of inflation has significantly disrupted business operations.”

Highlights

  • Forty-seven percent of owners reported job openings that could not be filled, unchanged from March.
  • The net percent of owners raising average selling prices decreased two points to a net 70% (seasonally adjusted), two points below last month’s highest reading.
  • The net percent of owners who expect real sales to be higher increased six points from March to a net negative 12%.
  • Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent of owners reported all credit needs met and 61% said they were not interested in a loan.
  • Thirty-six percent of owners reported that supply chain disruptions have had a significant impact on their business. Another 34% report a moderate impact and 20% report a mild impact. Only 8% of owners reported no impact from recent supply chain disruptions.

LABOR MARKETS 


As employment continues to approach the 2020 high, labor markets get tighter. Fifty-one percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 4 points from April. Forty-two percent have openings for skilled workers (up 2 points) and 25 percent have openings for unskilled labor (up 3 points). The difficulty in filling open positions is particularly acute in the construction, manufacturing, retail, and wholesale sectors. Openings are lowest in the agriculture and finance sectors. Overall, however, the current level of openings is over 20 percentage points higher than the historical average. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 26 percent planning to create new jobs in the next three months, up 6 points from April and close to a 48-year record high. Sixty-one percent (92 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (up 6 points). Thirty-three percent of owners reported few qualified applicants for their open positions (up 3 points) and 28 percent reported none (up 3 points, and 1 point shy of the 48-year record high).

CAPITAL SPENDING


Fifty-three percent reported capital outlays in the last six months, down 1 point from April. Surprisingly, orders for capital goods have remained strong for the whole economy, less so for small firms which dominate the services sectors. Of those making expenditures, 36 percent reported spending on new equipment (down 4 points), 21 percent acquired vehicles (down 3 points), and 15 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (down 2 points) and 12 percent spent money for new fixtures and furniture (up 1 point). Twenty-five percent plan capital outlays in the next few months, down 2 points from April. A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owner views about the future are not supportive. In addition, Federal Reserve actions will raise interest rates, increasing the cost of financing capital projects and reducing the expected gains from investments.

LABOR MARKETS 


As employment continues to approach the 2020 high, labor markets get tighter. Fifty-one percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 4 points from April. Forty-two percent have openings for skilled workers (up 2 points) and 25 percent have openings for unskilled labor (up 3 points). The difficulty in filling open positions is particularly acute in the construction, manufacturing, retail, and wholesale sectors. Openings are lowest in the agriculture and finance sectors. Overall, however, the current level of openings is over 20 percentage points higher than the historical average. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 26 percent planning to create new jobs in the next three months, up 6 points from April and close to a 48-year record high. Sixty-one percent (92 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (up 6 points). Thirty-three percent of owners reported few qualified applicants for their open positions (up 3 points) and 28 percent reported none (up 3 points, and 1 point shy of the 48-year record high).

Planning to Hire
Hire Enough Workers
Hiring

CAPITAL SPENDING


Fifty-three percent reported capital outlays in the last six months, down 1 point from April. Surprisingly, orders for capital goods have remained strong for the whole economy, less so for small firms which dominate the services sectors. Of those making expenditures, 36 percent reported spending on new equipment (down 4 points), 21 percent acquired vehicles (down 3 points), and 15 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (down 2 points) and 12 percent spent money for new fixtures and furniture (up 1 point). Twenty-five percent plan capital outlays in the next few months, down 2 points from April. A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owner views about the future are not supportive. In addition, Federal Reserve actions will raise interest rates, increasing the cost of financing capital projects and reducing the expected gains from investments.

INFLATION


The net percent of owners raising average selling prices increased 2 points from April to a net 72 percent seasonally adjusted (the same as March 2022 and a record high reading). Unadjusted, 3 percent (down 1 point) reported lower average selling prices and 71 percent (up 1 point) reported higher average prices. Price hikes were most frequent in wholesale (80 percent higher, 4 percent lower), manufacturing (79 percent higher, 1 percent lower), retail trades (78 percent higher, 2 percent lower), and construction (77 percent higher, 2 percent lower). Seasonally adjusted, a net 47 percent plan price hikes (up 1 point).

CREDIT MARKETS


Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-two percent reported all credit needs met (down 6 points) and 65 percent said they were not interested in a loan (up 4 points). A net 4 percent reported their last loan was harder to get than in previous attempts (unchanged). One percent reported that financing was their top business problem (unchanged). A net 14 percent of owners reported paying a higher rate on their most recent loan, down 2 points from April. The average rate paid on short maturity loans was 5.7 percent, still among the lowest rates paid in the 48-year survey history. Twenty-two percent of all owners reported borrowing on a regular basis (down 4 points).

COMPENSATION AND EARNINGS


Seasonally adjusted, a net 46 percent reported raising compensation, down 3 points from April. A net 25 percent plan to raise compensation in the next three months, down 2 points from April but historically very high. Twelve percent cited labor costs as their top business problem, up 4 points from April, and 23 percent said that labor quality was their top business problem (unchanged). Labor quality remains in second place behind “inflation.” The frequency of reports of positive profit trends was a net negative 24 percent, down 7 points from April. Among owners reporting lower profits, 34 percent blamed the rise in the cost of materials, 25 percent blamed weaker sales, and 10 percent cited labor costs. For owners reporting higher profits, 49 percent credited sales volumes,18 percent cited higher prices, and 16 percent cited usual seasonal change.

SALES AND INVENTORIES


One percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from April. The net percent of owners expecting higher real sales volumes decreased 3 points to a net negative 15 percent. The net percent of owners reporting inventory increases fell 5 points to a net negative 1 percent. Not seasonally adjusted, 17 percent reported increases in stocks while 15 percent reported reductions. Thirty-nine percent of owners report that supply chain disruptions have had a significant impact on their business (up 3 points). Another 31 percent report a moderate impact and 22 percent report a mild impact. Only 8 percent report no impact from recent supply chain disruptions. A net 8 percent of owners viewed current inventory stocks as “too low” in May, up 2 points from April. A net 1 percent of owners plan inventory investment in the coming months, unchanged from April.

COMMENTARY


Things are pretty messy these days. Inflation out of control. Stock markets are sagging. The war in Ukraine continues. And China’s zero Covid policy remains in place. A lot of moving parts continue to disrupt the global economy. It’s a mess indeed.

Inflation is now taxing earnings at an unacceptable rate. Compensation is growing at an annual rate of about 6% but inflation is at 8%, reducing real incomes. As is always the case, the impact is not evenly spread across the population, especially harmful to those on fixed incomes and those earning less than average incomes. House prices are up 20% over the year so those interested in homeownership are being priced out of the market. Mortgage rates are rising as well. To combat inflation, the Federal Reserve will rapidly raise interest rates to slow spending. The prime rate of interest hit 20% during the last big inflation fight over 40 years ago. For this round, prime started at 3.5%. It will go higher, and borrowers will pay more for loans. But for now, borrowing is still relatively inexpensive but maybe not for long.

For the moment, the economy seems to be doing okay despite continuing supply side issues that are holding down profits, not due weak spending. But we are skating on thin ice, cracks are appearing, and the cold water is deep. We are short on life preservers. But the Administration refuses to ease up on the policies it implemented that produced higher energy costs and overheated spending. Instead, it proposes more spending, bigger government, and higher taxes, all of which will raise prices. Owners remain very pessimistic about the second half of the year. But until a recession shows its face, they will “make hay while the sun shines.”

Source: May 2022 Report: Small Business Optimism Index

From The TradersCommunity News Desk