The NFIB Small Business Optimism Index decreased two points in January to 89.9, marking the 25th consecutive month below the 50-year average of 98. The net percent of owners who expect real sales to be higher declined 12 points from December to a net negative 16% (seasonally adjusted), a very negative shift in expectations.

“Small business owners continue to make appropriate business adjustments in response to the ongoing economic challenges they’re facing,” said NFIB Chief Economist Bill Dunkelberg. “In January, optimism among small business owners dropped as inflation remains a key obstacle on Main Street.”

Key findings include:

- The frequency of reports of positive profit trends was a net negative 30%, five points worse than in December and a very poor reading.
- Twenty percent of owners reported that inflation was their single most important problem in operating their business, down three points from last month and one point behind labor quality as the top problem.
- Small business owners’ plans to fill open positions softened, with a seasonally adjusted net 14% planning to create new jobs in the next three months, down two points from December and the lowest level since May 2020.
- Thirty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down one point from December and the lowest reading since January 2021.

As reported in NFIB’s monthly jobs report, 39% (seasonally adjusted) of all owners reported job openings they could not fill in the current period. Seasonally adjusted, a net 39% reported raising compensation, up three points from December. A seasonally adjusted net 26% plan to raise compensation in the next three months, down three points from December. Ten percent cited labor costs as their top business problem and 21% said that labor quality was their top business problem.

Fifty-nine percent of owners reported capital outlays in the last six months, up one point from December. Of those making expenditures, 40% reported spending on new equipment, 25% acquired vehicles, and 17% improved or expanded facilities. Twelve percent of owners spent money on new fixtures and furniture and 7% acquired new buildings or land for expansion. Twenty-three percent (seasonally adjusted) plan capital outlays in the next few months.

A net negative 11% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from December. The net percent of owners expecting higher real sales volumes declined 12 points to a net negative 16%.

The net percent of owners reporting inventory gains increased two points to 0%. Not seasonally adjusted, 13% reported increases in stocks and 19% reported reductions, up four points. A net negative 4% of owners viewed current inventory stocks as “too low” in January, up one point from December. By industry, shortages are reported most frequently in the wholesale (18%), retail (12%), and finance (11%) sectors. Shortages were reported least frequently in the professional services (2%) and construction (4%) sectors. A net negative 3% of owners plan inventory investment in the coming months, up two points from December.

The net percent of owners raising average selling prices declined three points from December to a net 22% seasonally adjusted. Fifteen percent of owners reported lower selling prices, the highest since August 2020. Twenty percent of owners reported that inflation was their single most important problem in operating their business, down three points from last month and one point behind labor quality as the top problem.

Unadjusted, 15% reported lower average selling prices and 36% reported higher average prices. Price hikes were the most frequent in wholesale (47% higher, 7% lower), retail (43% higher, 11% lower), services (43% higher, 6% lower), finance (42% higher, 14% lower), and construction (36% higher, 9% lower). Seasonally adjusted, a net 33% plan price hikes.

The frequency of reports of positive profit trends was a net negative 30%, five points worse than in December and a very poor reading. Among owners reporting lower profits, 32% blamed weaker sales, 15% blamed the rise in the cost of materials, 15% cited usual seasonal change, and 11% cited labor costs. For owners reporting higher profits, 49% credited sales volumes, 24% cited usual seasonal change, and 9% cited higher selling prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs met and 62% said they were not interested in a loan.

A net 6% reported their last loan was harder to get than in previous attempts. Five percent of owners reported that financing was their top business problem. A net 18% of owners reported paying a higher rate on their most recent loan, down two points from December.

The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the fourth 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 January 2024.

LABOR MARKETS

Thirty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 1 point from December and the lowest reading since January 2021. Thirty percent have openings for skilled workers (down 3 points) and 15 percent have openings for unskilled labor (up 1 point). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and non-professional services sectors. Job openings in construction were down 11 points from last month but almost half have a job opening they can’t fill. Openings were the lowest in the professional services and finance sectors. Owners’ plans to fill open positions continue to soften, with a seasonally adjusted net 14 percent planning to create new jobs in the next three months, down 2 points from December and the lowest level since May 2020. Overall, 55 percent reported hiring or trying to hire in January, unchanged from December. Forty-nine 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). Twenty-six percent of owners reported few qualified applicants for their open positions (down 2 points) and 23 percent reported none (up 2 points). Reports of labor quality as the single most important problem for business owners increased 1 point to 21 percent, and labor cost rose 1 point to 10 percent.

CAPITAL SPENDING

Fifty-nine percent reported capital outlays in the last six months, up 1 point from December. A recovery in investment is needed to support an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions and lending standards tighten with high interest rates. Longer term, the worker shortage has given firms an incentive to invest in labor saving technology. But, overall, capital spending is not strong historically. Of those making expenditures, 40 percent reported spending on new equipment (unchanged), 25 percent acquired vehicles (up 3 points), and 17 percent improved or expanded facilities (down 2 points). Twelve percent spent money on new fixtures and furniture (up 1 point) and 7 percent acquired new buildings or land for expansion (up 2 points). Twenty-three percent (seasonally adjusted) plan capital outlays in the next few months, down 1 point from December. 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 and financing costs are very high. Investment is needed to address labor supply chain problems which still persist in the current environment.

INFLATION

The net percent of owners raising average selling prices declined 3 points from December to a net 22 percent seasonally adjusted. Fifteen percent reported lower selling prices, the highest since August 2020. Twenty percent of owners reported that inflation was their single most important problem in operating their business (higher input and labor costs), down 3 points from last month and 1 point behind labor quality as the top problem. Unadjusted, 15 percent (unchanged) reported lower average selling prices and 36 percent (unchanged) reported higher average prices. Price hikes were most frequent in wholesale (47 percent higher, 7 percent lower), retail (43 percent higher, 11 percent lower), services (43 percent higher, 6 percent lower), finance (42 percent higher, 14 percent lower), and construction (36 percent higher, 9 percent lower). Seasonally adjusted, a net 33 percent plan price hikes (up 1 point).

CREDIT MARKETS

Three percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-six percent reported all credit needs met (up 1 point) and 62 percent said they were not interested in a loan (up 1 point). A net 6 percent reported their last loan was harder to get than in previous attempts (down 2 points). Five percent reported that financing was their top business problem (unchanged). A net 18 percent of owners reported paying a higher rate on their most recent loan, down 2 points from December. The average rate paid on short maturity loans was 9.0 percent, down 0.8 of a percentage point from last month. Twenty-nine percent of all owners reported borrowing on a regular basis (unchanged).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 39 percent reported raising compensation, up 3 points from December. A seasonally adjusted net 26 percent plan to raise compensation in the next three months, down 3 points from December. The frequency of reports of positive profit trends was a net negative 30 percent, 5 points worse than December, and a very poor reading. Among owners reporting lower profits, 32 percent blamed weaker sales, 15 percent blamed the rise in the cost of materials, 15 percent cited usual seasonal change, and 11 percent cited labor costs. For owners reporting higher profits, 49 percent credited sales volumes, 24 percent cited usual seasonal change, and 9 percent cited higher selling prices.

SALES AND INVENTORIES

A net negative 11 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, unchanged from December. The net percent of owners expecting higher real sales volumes declined 12 points to a net negative 16 percent. The net percent of owners reporting inventory gains increased 2 points to 0 percent. Not seasonally adjusted, 13 percent reported increases in stocks (up 1 point) and 19 percent reported reductions (up 4 points). A net negative 4 percent of owners viewed current inventory stocks as “too low” (e.g. inventories are too large) in January, up 1 point from December. By industry, shortages are reported most frequently in the wholesale (18 percent), retail (12 percent), and finance (11 percent) sectors. Shortages were reported least frequently in the professional services (2 percent) and construction (4 percent) sectors. A net negative 3 percent of owners plan inventory investment in the coming months (more plan reductions than increases), up 2 points from December.

COMMENTARY

All eyes are on the Federal Reserve and how many rate cuts they might initiate this year. Given the strength of the economy, the Federal Reserve might prefer to leave rates where they are to fend off any inflationary forces that the late 2023 surge in the economy might produce. The real rate of interest will rise as inflation recedes. As inflation falls, the burden of a 5% interest rate rises because the financial markets can no longer earn profits to cover interest costs when they can’t raise prices (as much as before). This is a justification for interest rate cuts which will keep the cost of credit from rising in real terms (which is what matters).

Inflation pressures from Main Street have declined by 50% since peaking in 2021. Wage cost pressures have also moderated significantly, although not as much as price hikes, a significant cost for labor intensive firms is easing. However, prices are now 20% higher than they were in 2020, an increase that strips the purchasing power out of the earnings of most workers. Prices are still rising and even if inflation reaches zero, consumers will have to live with higher prices. As Treasury Secretary Yellen said, most people don’t think prices will fall (CNBC December 13, 2024). And if prices don’t fall, most consumers will experience a permanent reduction in their real incomes as their wages will buy less than they did in 2020.

Growing debt and associated increases in delinquencies and loan losses pose a risk that can rapidly accelerate a downturn in economic activity. Most student loan recipients are not making payments on their loans, hoping that President Biden will cancel their obligations (and stick taxpayers with the $6 trillion cost). Massive government spending, financed with new Treasury borrowing (at decades’ high interest rates), powered the economy in 2023. Because of this massive spending, the debt grew and interest paid on the debt also grew, crowding out other government spending. One observer of the growing debt threat warned: “Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly.” (Endgame, 2011 John Mauldin).

Small business owners can’t set economic policy, they can only respond to policy changes. Interest costs are still significantly higher, 9% on average compared to 5% in 2020. Labor costs are dictated by economic policies, inflation in particular. In 2020, an average 25% raised compensation compared to 40% last year. Tax policy remains uncertain and government agencies continue to spew out new regulations. But despite the headwinds, the consumer remains resilient, moving the economy forward. Hopefully this will be enough for the “soft landing” that we’re all hoping for in 2024.