The NFIB Small Business Optimism Index declined 5.5 points in December to 95.9, falling below the average Index value since 1973 of 98. Nine of the 10 Index components declined and only one improved. Owners expecting better business conditions over the next six months declined 24 points to a net negative 16%.

“This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

Key findings include:
- The NFIB Uncertainty Index decreased 8 points to 82.
- The percent of owners thinking it’s a good time to expand decreased 4 points to 8%.
- Sales expectations over the next three months declined 14 points to a net negative 4%.
- Earnings trends over the past three months declined 7 points to a net negative 14% reporting higher earnings.

As reported in NFIB’s monthly jobs report, small business job growth continued in December but the gains remain uneven as certain sectors of the economy are slowing due to state-mandated business closures and consumer resistance to spend.

A net 21% (seasonally adjusted) of owners reported raising compensation and a net 14% plan to do so in the coming months.

Fifty-two percent of owners reported capital outlays in the last six months. Of those owners making expenditures, 38% reported spending on new equipment, 20% acquired vehicles, and 11% improved or expanded facilities. Five percent acquired new buildings or land for expansion and 8% spent on new fixtures and furniture. Twenty-two percent plan capital outlays in the next few months.

Seasonally adjusted, a net negative 2% of all owners reported higher nominal sales in the past three months, down 7 points from November. The net percent of owners expecting higher real sales volumes decreased 14 points to a net negative 4%.

The net percent of owners reporting inventory increases decreased 2 points to a net negative 6%. The net percent of owners viewing current inventory stocks as too low increased 2 points to 7%, a record high. A net 4% of owners plan inventory investment in the coming months, down 1 point from November but historically high.

The net percent of owners raising average selling prices decreased 2 points to a net 16% (seasonally adjusted). Price hikes were the most frequent in retail (30% higher, 6% lower) and wholesale (26% higher, 13% lower). A net 22% are planning price hikes (seasonally adjusted).

The frequency of reports of positive profit trends decreased 7 points to a net negative 14% reporting quarter on quarter profit improvement. Among owners reporting weaker profits, 55% blamed weak sales, 11% cited usual seasonal change, 6% cited a higher cost of materials, 6% cited labor costs, and 3% cited lower prices. For owners reporting higher profits, 69% credited sales volumes, 16% cited usual seasonal change, and 6% cited higher prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs were met and 60% said they were not interested in a loan.

LABOR MARKETS
Job growth continued in December. Firms increased employment by 0.3 workers per firm on average over the past few months, an increase of 0.14 workers per firm compared to November. Eight percent (down 4 points) reported increasing employment an average of 4.1 workers per firm and 13 percent (down 1 point) reported reducing employment an average of 2.8 workers per firm (seasonally adjusted). Thirty-two percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from November. Twenty-seven percent have openings for skilled workers (down 2 points) and 11 percent have openings for unskilled labor (down 2 points). Owners have plans to fill open positions, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, down 4 points from November but historically very strong. Overall, 54 percent reported hiring or trying to hire in December, up 1 point from November. Finding qualified employees remains a problem. Forty-eight 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 in December. Twenty-six percent of owners reported few qualified applicants for their open positions (down 1 point) and 22 percent reported none (up 2 points).

CAPITAL SPENDING
Fifty-two percent reported capital outlays in the last six months, down 1 point from November. Of those making expenditures, 38 percent reported spending on new equipment (unchanged), 20 percent acquired vehicles (down 4 points), and 11 percent improved or expanded facilities (down 6 points). Five percent acquired new buildings or land for expansion (unchanged), and 8 percent spent money for new fixtures and furniture (down 5 points). Twenty-two percent plan capital outlays in the next few months, down 4 points from November.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 21 percent reported raising compensation (down 3 points) and a net 14 percent plan to do so in the coming months, down 6 points. The frequency of reports of positive profit trends decreased 7 points to a net negative 14 percent reporting quarter on quarter profit improvement. The sharp recovery from April’s low was good news but now seems to be losing ground as new Covid restrictions were put in place and consumers found it more difficult to maintain spending. Among owners reporting weaker profits, 55 percent blamed weak sales, 11 percent cited usual seasonal change, 6 percent cited a higher cost of materials, 6 percent cited labor costs, and 3 percent cited lower prices. For owners reporting higher profits, 69 percent credited sales volumes, 16 percent cited usual seasonal change, and 6 percent cited higher prices.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-six percent reported all credit needs met (up 1 point) and 60 percent said they were not interested in a loan (up 2 points). A net 3 percent reported their last loan was harder to get than in previous attempts (up 1 point). Credit markets have never been friendlier, and the Federal Reserve promises that will continue indefinitely. Add to this the reopening of the PPP program allowing eligible small business owners to access a second forgivable loan, easing demand for additional private sector borrowing. One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was negative 5 percent, down 1 point from November. The average rate paid on short maturity loans was 4.8 percent, up 0.1 percentage points from November. Twenty-six percent of all owners reported borrowing on a regular basis (up 4 points).

SALES AND INVENTORIES
A net negative 2 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 7 points from November. The net percent of owners expecting higher real sales volumes decreased 14 points to a net negative 4 percent. The net percent of owners reporting inventory increases decreased 2 points to a net negative 6 percent. The net percent of owners viewing current inventory stocks as “too low” increased 2 points in December to 7 percent, a record high. Correspondingly, plans to accumulate more inventory have remained historically strong. A net 4 percent of owners plan inventory investment in the coming months, down 1 point.

INFLATION
The net percent of owners raising average selling prices decreased 2 points to a net 16 percent, seasonally adjusted. Price hikes have returned to normal levels and there is no surge in the inflation rate anticipated by current price levels. Unadjusted, 10 percent (up 2 points) reported lower average selling prices and 22 percent (down 1 point) reported higher average prices. Price hikes were most frequent in retail (30 percent higher, 6 percent lower) and wholesale (26 percent higher, 13 percent lower). Seasonally adjusted, a net 22 percent plan price hikes (up 1 point).

COMMENTARY
2020 is now behind us. But what happened in 2020 will not stay in 2020, it will spill into 2021 with a vengeance. Covid-19 is spreading at record rates and hospitals are at capacity in many states. Several vaccines were proven effective in trials, approved for emergency use, and now being distributed. But business restrictions and consumer spending shifts are still firmly in place and will be until the spread of Covid-19 is largely curbed.

The drop in small business optimism was historically very large, taking the Optimism Index below the historical average of 98. Most of the decline was a result of substantial weakness in the outlook for sales and business conditions in 2021 which brings new Covid threats and the uncertainty about economic policy with a new administration in Washington. New support programs for consumer spending and grants for small firms are rolling out, it’s a foot race between using up financial resources and getting the virus under control so the economy can open up and Main Street can get back to work.

However, the economy enters 2021 in much better shape than most expected half a year ago. GDP has almost recovered to its 2019 level. But there isn’t much joy on Main Street, as tens of thousands of small business owners struggle to stay open and save the millions of jobs they created. The PPP and similar programs were welcomed assistance and overall effective as a “bridge” to economic recovery. Consumers were given a substantial income boost, but regulations and uncertainty kept much of it from being spent. Millions of small firms depend on “foot traffic,” which was widely discouraged or prohibited by governments.

The housing market was a real workhorse for the economy last year, heading into 2021 in a bubble. New construction cannot keep up with demand and house prices are rising dramatically as inventory and mortgage rates are at record lows. Construction firms cannot find enough qualified workers to support an increase in new housing starts. The stock market is also in bubble territory, with the prices of a handful of stocks posting outrageous gains, supported by interest rates held artificially low by the Federal Reserve. Half a dozen firms account for 30 percent of the value of the S&P 500.

The U.S. economy moves into 2021 with many of the same challenges it faced in 2020 but new opportunities and challenges will certainly change the landscape going forward and small businesses will continue to adjust accordingly.