The NFIB Small Business Optimism Index rose 1.9 points in August to 91.8, marking the eighth consecutive month below the 48-year average of 98 but reversing some of the declines in the first half of the year. Twenty-nine percent of owners reported that inflation was their single most important problem in operating their business, a decrease of eight points from July’s highest reading since the fourth quarter of 1979.

“The small business economy is still recovering from the pandemic while inflation continues to be a serious problem for owners across the nation,” said NFIB Chief Economist Bill Dunkelberg. “Owners are managing the rising costs of utilities, fuel, labor, supplies, materials, rent, and inventory to protect their earnings. The worker shortage is impacting small business productivity as owners raise compensation to attract better workers.”

Key findings include:

- Small business owners expecting better business conditions over the next six months improved 10 points from July to a net negative 42%, the highest level since February 2022, but a dismal outlook.
- The net percent of owners raising average selling prices decreased three points to a net 53% (seasonally adjusted), still a very inflationary outcome.
- The net percent of owners who expect real sales to be higher increased 10 points from July to a net negative 19%, but owners still want to hire.
- The Uncertainty Index increased seven points to 74.

As reported in NFIB’s monthly jobs report, 49% of owners reported job openings that were hard to fill, unchanged from July and remaining historically high. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 21% planning to create new jobs in the next three months.

Fifty-two percent of owners reported capital outlays in the last six months, up one point from July. Of those making expenditures, 36% reported spending on new equipment, 18% acquired vehicles, and 14% improved or expanded facilities. Thirteen percent spent money for new fixtures and furniture and 6% acquired new buildings or land for expansion. Twenty-five percent of owners plan capital outlays in the next few months, up three points from July. Overall, spending and plans to spend are still historically weak.

A net negative 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down three points from July. The net percent of owners expecting higher real sales volumes improved by 10 points to a net negative 19%.

The net percent of owners reporting inventory increases fell seven points to a net negative 6%. Fifteen percent of owners reported increases in stocks and 19% reported reductions as solid sales reduced inventories at many firms.

Thirty-two percent of owners reported that supply chain disruptions have had a significant impact on their business. Another 33% report a moderate impact and 23% report a mild impact. Only 11% report no impact from recent supply chain disruptions.

A net 3% of owners viewed current inventory stocks as “too low” in August. Shortages are reported most frequently in the manufacturing (24%), transportation (23%), retail (19%), agriculture (14%), and construction (11%) industries. A net 4% of owners plan inventory investment in the coming months, up three points from July. Auto dealers and other durable goods merchants are still low on inventory.

The net percent of owners raising average selling prices decreased three points from July to a net 53% (seasonally adjusted). Unadjusted, 8% reported lower average selling prices and 60% reported higher average prices. Price hikes were the most frequent in construction (71% higher, 3% lower), retail (67% higher, 7% lower), transportation (62% higher, 0% lower), and manufacturing (61% higher, 3% lower). Seasonally adjusted, a net 32% of owners plan price hikes, down five points.

Seasonally adjusted, a net 46% of owners reported raising compensation, down two points from July. A net 26% plan to raise compensation in the next three months, up one point from July and historically very high. Ten percent of owners cited labor costs as their top business problem and 26% said that labor quality was their top business problem. Labor quality remains in second place behind “inflation” by three points.

The frequency of reports of positive profit trends was a net negative 33%, down seven points from July. Among the owners reporting lower profits, 36% blamed the rise in the cost of materials, 23% blamed weaker sales, 12% cited labor costs, 7% cited lower prices, 6% cited the usual seasonal change, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 38% credited sales volumes, 35% cited usual seasonal change, and 13% cited higher prices.

Four percent of owners reported that all their borrowing needs were not satisfied. Twenty-three percent reported all credit needs were met and 60% said they were not interested in a loan. A net 6% reported their last loan was harder to get than in previous attempts. One percent reported that financing was their top business problem. A net 21% of owners reported paying a higher rate on their most recent loan.

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 August 2022.

LABOR MARKETS
Forty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from July. Forty-one percent have openings for skilled workers (down 1 point) and 24 percent have openings for unskilled labor (up 3 points). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and transportation sectors. Openings are lowest in the agriculture and wholesale sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 21 percent planning to create new jobs in the next three months (up 1 point). Successes will add to employment and produce more output to sell to anxious customers, but gains will be hard to come by. Fiftyseven percent (89 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (unchanged). Thirty-one percent of owners reported few qualified applicants for their open positions (up 1 point) and 26 percent reported none (down 1 point, and just 3 points shy of the 48- year record high).

CAPITAL SPENDING
Fifty-two percent reported capital outlays in the last six months, up 1 point from July. Of those making expenditures, 36 percent reported spending on new equipment (unchanged), 18 percent acquired vehicles (down 3 points), and 14 percent improved or expanded facilities (unchanged). Thirteen percent spent money for new fixtures and furniture (up 4 points) and 6 percent acquired new buildings or land for expansion (up 1 point). Twenty-five percent plan capital outlays in the next few months, up 3 points from July. 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.

INFLATION
The net percent of owners raising average selling prices decreased 7 points from June to a net 56 percent seasonally adjusted. Unadjusted, 8 percent (up 4 points) reported lower average selling prices and 65 percent (down 4 points) reported higher average prices. Price hikes were most frequent in wholesale (80 percent higher, 8 percent lower), manufacturing (73 percent higher, 7 percent lower), construction (73 percent higher, 4 percent lower), and retail (72 percent higher, 6 percent lower). Seasonally adjusted, a net 37 percent plan price hikes (down 12 points). The seasonal adjustments for price plans and actual prices were revised. The data presented in this report reflect those changes.

CREDIT MARKETS
The net percent of owners raising average selling prices decreased 3 points from July to a net 53 percent seasonally adjusted. Unadjusted, 8 percent (unchanged) reported lower average selling prices and 60 percent (down 5 points) reported higher average prices. Price hikes were most frequent in construction (71 percent higher, 3 percent lower), retail (67 percent higher, 7 percent lower), transportation (62 percent higher, 0 percent lower), and manufacturing (61 percent higher, 3 percent lower). Seasonally adjusted, a net 32 percent plan price hikes (down 5 points).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 46 percent reported raising compensation, down 2 points from July. A net 26 percent plan to raise compensation in the next three months. Ten percent cited labor costs as their top business problem, up 1 point from July, and 26 percent said that labor quality was their top business problem (up 5 points). Labor quality remains in second place behind “inflation” by 3 points. The frequency of reports of positive profit trends was a net negative 33 percent, down 7 points from July. Among owners reporting lower profits, 36 percent blamed the rise in the cost of materials, 23 percent blamed weaker sales, 12 percent cited labor costs, 7 percent cited lower prices, 6 percent cited the usual seasonal change, and 4 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 38 percent credited sales volumes, 35 percent cited usual seasonal change, and 13 percent cited higher prices.

SALES AND INVENTORIES
A net negative 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 3 points from July. The net percent of owners expecting higher real sales volumes improved by 10 points to a net negative 19 percent. The net percent of owners reporting inventory increases fell 7 points to a negative 6 percent. Not seasonally adjusted, 15 percent reported increases in stocks and 19 percent reported reductions. Thirty-two percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 33 percent report a moderate impact and 23 percent report a mild impact. Only 11 percent report no impact. A net 3 percent of owners viewed current inventory stocks as “too low” in August. By industry, shortages are reported most frequently in manufacturing (24%), transportation (23%), retail (19%), agriculture (14%), and construction (11%). A net 4 percent of owners plan inventory investment in the coming months up 3 points from July.

COMMENTARY
Inflation remains the #1 problem for small business owners. Gas is cheaper, but not much else. Congress passed the Inflation Reduction Act, but most analysts, regardless of political persuasion, think it won’t have much impact on the inflation rate, if any. Looks like we’ll have to rely on the Federal Reserve for some policy help, and we’ll probably get a heavy dose of it. Expect the Fed to raise its policy rate by another 75 basis points in its next meeting, and additional hikes beyond. And it is curtailing its purchase of Treasury bonds which will also put upward pressure on market interest rates. Mortgage interest rates have already doubled and will rise further, slowing down housing purchases and construction.

Higher borrowing costs will not contribute to inflation, lots of businesses don’t operate with bank (etc.) loans. To slow inflation, costs coming in the back door must fall and that includes more than the cost of loans. Utilities, fuel, labor, supplies, materials, rent, and inventory, all rising at near double-digit rates. Slowing the economy (the Fed’s goal) will reduce demand, create excess capacity and inventories, and this will put a downward pressure on selling prices, but input costs won’t respond immediately, including labor costs which will be managed by cutting employment and hours, not wage cuts. Wages will stop rising, and be reduced in real terms as inflation persists, which it will for the rest of the year and into 2023.

The global economy looks set to have a more severe slowdown than the U.S., bad news for our exports already adversely affected by the strong dollar which makes our products more expensive to other countries. There is still too much stimulus coming from federal and state governments, but that will continue to slow down except for unemployment benefits when firms start laying off workers. It will be a rough road ahead as we feel the brunt of new Fed. policies designed to undo the damage done by policies that created our current inflation problems.