One significant result of the economic trend described in the excerpt was the

The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in November 2022.

Small Business Optimism Index

November 2022 Report:Inflation Pressures Ease Slightly on Main Street but Remains the Top Business Problem

Inflation remains the top business problem for small business owners, with 32% of owners reporting it as their single most important problem in operating their business, five points lower than July’s highest reading since the fourth quarter of 1979. The Small Business Optimism Index rose 0.6 points in November to 91.9. November’s reading is the 11th consecutive month below the 49-year average of 98.

“Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high,” said NFIB Chief Economist Bill Dunkelberg. “The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.”

Key findings include:

• Owners expecting better business conditions over the next six months improved three points from October to a net negative 43%, a recession reading.
• Forty-four percent of owners reported job openings that were hard to fill, down two points from October, but historically high and not typical of a recession period.
• The net percent of owners raising average selling prices increased one point to a net 51% seasonally adjusted, a high reading but lower than earlier this year.
• The net percent of owners who expect real sales to be higher improved five points from October to a net negative 8%, a weak economic reading.

As reported in NFIB’s monthly jobs report, 44% of all owners reported job openings they could not fill in the current period. The difficulty in filling open positions is particularly acute in the transportation, wholesale, and construction sectors. Owners’ plans to fill open positions remain elevated, with a net 18% (seasonally adjusted) planning to create new jobs in the next three months.

Fifty-five percent of owners reported capital outlays in the last six months, up one point from October. Of those making expenditures, 39% of owners reported spending on new equipment, 19% acquired vehicles, and 12% improved or expanded facilities. Eleven percent spent money for new fixtures and furniture and 5% acquired new buildings or land for expansion. Up one point from October, 24% plan capital outlays in the next few months. Overall, capital spending remains too weak to improve productivity.

A net negative 7% of all owners (seasonally adjusted) reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes improved five points to a net negative 8%, a weak reading. The net percent of owners reporting inventory increases rose six points to a net 5%. Nineteen percent reported increases in stocks and 14% reported reductions.

Twenty-nine percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 34% report a moderate impact and 26% report a mild impact. Only 11% report no impact from recent supply chain disruptions.

A net negative 2% of owners viewed current inventory stocks as “too low” in November, down two points. By industry, shortages were the most frequent in wholesale (18%), manufacturing (14%), transportation (12%), and retail (11%). Shortages in construction (9%) have been reduced because of home sales and new construction have slowed. Down six points from October, a net negative 4% of owners plan inventory investment in the coming months. Overall. Inventories are starting to build, but only modestly to date.

The net percent of owners raising average selling prices increased one point from October to a net 51% seasonally adjusted. Unadjusted, 8% of owners reported lower average selling prices and 56% reported higher average prices. Price hikes were the most frequent in wholesale (73% higher, 0% lower), retail (69% higher, 7% lower), construction (66% higher, 5% lower), and manufacturing (63% higher, 5% lower). Seasonally adjusted, a net 34% plan price hikes.

Seasonally adjusted, a net 40% reported raising compensation, down four points from October. A net 28% of owners plan to raise compensation in the next three months, down four points from October’s reading. Nine percent of owners cited labor costs at their top business problem and 21% said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 22%. Among owners reporting lower profits, 29% blamed the rise in the cost of materials, 25% blamed weaker sales, 10% cited labor costs, 9% cited lower prices, 6% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 57% credited sales volumes, 15% cited usual seasonal change, and 12% cited higher prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-two percent reported all credit needs were met and 62% said they were not interested in a loan. Three percent reported that financing was their top business problem, up two points and the highest since December 2018.

The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are randomly drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in November 2022.

LABOR MARKETS 

Forty-four percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from October. Thirty-seven percent have openings for skilled workers (down 3 points) and 16 percent have openings for unskilled labor (down 6 points). The difficulty in filling open positions is particularly acute in the transportation, wholesale, and construction sectors. Openings are lowest in the finance and agriculture sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18 percent planning to create new jobs in the next three months (down 2 points), although it is the lowest reading since January 2021. Fifty-four 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 (down 1 point). Thirty-one percent of owners reported few qualified applicants for their open positions (up 1 point) and 23 percent reported none (down 2 points).

CAPITAL SPENDING

Fifty-five percent reported capital outlays in the last six months, up 1 point from October. Of those making expenditures, 39 percent reported spending on new equipment (up 2 points), 19 percent acquired vehicles (down 3 points), and 12 percent improved or expanded facilities (down 5 points). Eleven percent spent money for new fixtures and furniture (unchanged) and 5 percent acquired new buildings or land for expansion (down 1 point). Twenty-four percent plan capital outlays in the next few months, up 1 point from October. A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owners’ views about the future are not supportive. Investment is needed to address labor supply chain problems in the current environment. In addition, Federal Reserve actions will continue to 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 1 point from October to a net 51 percent seasonally adjusted. Unadjusted, 8 percent (unchanged) reported lower average selling prices and 56 percent (unchanged) reported higher average prices. Price hikes were most frequent in wholesale (73 percent higher, 0 percent lower), retail (69 percent higher, 7 percent lower), construction (66 percent higher, 5 percent lower), and manufacturing (63 percent higher, 5 percent lower). Seasonally adjusted, a net 34 percent plan price hikes (unchanged).

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 4 points) and 62 percent said they were not interested in a loan (unchanged). A net 5 percent reported their last loan was harder to get than in previous attempts (down 1 point). Three percent reported that financing was their top business problem (up 2 points and the highest since December 2018). A net 23 percent of owners reported paying a higher rate on their most recent loan, up 1 point from October. The average rate paid on short maturity loans was 7.9 percent, the highest since March 2008. Twenty-seven percent of all owners reported borrowing on a regular basis (down 1 point).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 40 percent reported raising compensation, down 4 points from October. A net 28 percent plan to raise compensation in the next three months, down 4 points from October. Nine percent cited labor costs as their top business problem, down 1 point from October, and 21 percent said that labor quality was their top business problem (down 2 points). Labor quality remains in second place behind “inflation” by 11 points. The frequency of reports of positive profit trends was a net negative 22 percent, 8 points more positive than October. Among owners reporting lower profits, 29 percent blamed the rise in the cost of materials, 25 percent blamed weaker sales, 10 percent cited labor costs, 9 percent cited lower prices, 6 percent cited the usual seasonal change, and 3 percent cited higher taxes or regulatory costs.

SALES AND INVENTORIES

A net negative 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, 1 point better than October. The net percent of owners expecting higher real sales volumes improved 5 points to a net negative 8 percent. The net percent of owners reporting inventory increases rose 6 points to a net 5 percent. Not seasonally adjusted, 19 percent reported increases in stocks and 14 percent reported reductions. Twenty-nine percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 34 percent report a moderate impact and 26 percent report a mild impact. Only 11 percent report no impact from recent supply chain disruptions. A net negative 2 percent of owners viewed current inventory stocks as “too low” in November, down 2 points from October. A net negative 4 percent of owners plan inventory investment in the coming months.

COMMENTARY

Forecasters have been predicting a recession since early in the year. The Small Business Optimism Index has been below its 49-year average all year and in historical recession territory most of that time, so small firms are forecasting a decline as well. But, everyone is not on board – yet. Consumer spending has been solid, most recently led by spending on new cars, now more available with the chip shortage fading, and supported by a declining saving rate out of an improving income, plus more credit use. Job creation is much lower than a year ago, but still solid while the labor force participation rate drifts lower. The Establishment Survey has reported job gains that are still positive, but trending down. The Household Survey continues to show employment declines, consistent with NFIB firms hiring reports.

The Leading Economic Indicators and the inverted yield curve clearly signal a recession ahead. The labor market is slowing but hasn’t crashed. Sometimes recessions appear quickly, triggered by major events like a financial market collapse (2008) or a government shutdown (Covid). But more typically, the economy eases into recession. Responding to the Fed’s interest rate policy does not happen quickly and the Fed does not reach its terminal policy rate level (about 5% expected) overnight. NFIB’s leading economic indicator has never missed in 50 years, and it predicts a slowdown.

NFIB data suggest that inflation pressures are easing, with the percent raising selling prices falling from 71% early in the year to 56% in November. Over the same period, the percent cutting prices has doubled from 4% to 8%. The percent reporting higher labor compensation has decline from 50% to 39%, a reduction in the
pressure to raise prices to cover costs. The percent of owners planning to raise prices averaged over 50% early in the year now stands at 35%. Inflation is fading on Main Street, but prices are still high and the percent still raising prices is too high to put inflation at the 2% Federal Reserve target. And, when inflation finally reaches the 2% level, the level of prices will still be much higher than they were a year or two
years ago.

The election changed the distribution of power in Congress, giving Republicans a small majority in the House but leaving the Democrats in charge in the Senate. The government budget for next year must be approved this month (or we have a government shutdown). A sensible approach would be to decide how much in total taxpayers will be expected to pay for, leaving the details to committees to sort out. However, the process that seems to materialize is to ask everyone how much they want, add it up, approve it, and then figure out how to pay for it with tax revenues (never enough) and new borrowing. This popular legislative process unfortunately will add more toour national debt and servicing costs. We could do this much more sensibly.

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