The NFIB Small Business Optimism Index was unchanged in April, remaining at 93.2 and the fourth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased one point to a net negative 50%, the lowest level recorded in the 48-year-old survey.

Inflation continues to be a problem for small businesses with 32% of small business owners reporting it’s their single most important problem in operating their business, the highest reading since the fourth quarter of 1980.

“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.”

Key findings include:

- 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%.

As reported in NFIB’s monthly jobs report, small businesses continue to struggle to find workers to fill open positions with 47% (seasonally adjusted) of all owners reported job openings they could not fill in the current period. Of those hiring or trying to hire, 93% of owners reported few or no qualified applicants for the positions they were trying to fill.

Fifty-four percent of owners reported capital outlays in the last six months, down two points from March. Of those owners making expenditures, 40% reported spending on new equipment, 24% acquired vehicles, and 14% improved or expanded facilities. Eight percent acquired new buildings or land for expansion and 11% spent money for new fixtures and furniture. Twenty-seven percent of owners plan capital outlays in the next few months, up one point from March.

Seasonally adjusted, 3% of all owners reported higher nominal sales in the past three months, down one point from March and a poor reading. The net percent of owners expecting higher real sales volumes increased by six points to a net negative 12%.

The net percent of owners reporting inventory increases went up four points to a net 4%. Nineteen percent of owners reported increases in stocks while 15% reported reductions as solid sales reduced inventories at many firms.

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.

Up three points from March, a net 6% of owners viewed current inventory stocks as “too low” in April. A net 1% of owners plan inventory investment in the coming months, down one point from March.

The net percent of owners raising average selling prices decreased two points from March’s record high reading to a net 70% (seasonally adjusted). Four percent reported lower average selling prices and 70% reported higher average prices. Price hikes were the most frequent in wholesale (85% higher, 0% lower), construction (81% higher, 3% lower), retail trades (76% higher, 4% lower), and manufacturing (70% higher, 3% lower). A net 46% of owners plan price hikes (seasonally adjusted).

A net 46% (seasonally adjusted) reported raising compensation, down three points from March. A net 27% of owners plan to raise compensation in the next three months. Eight percent of owners cited labor costs as their top business problem and 23% said labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 17%. Among the owners reporting lower profits, 34% blamed the rise in the cost of materials, 22% blamed weaker sales, 14% cited the usual seasonal change, 11% cited labor costs, 9% cited lower prices, and 2% cited higher taxes or regulatory costs. For the owners reporting higher profits, 51% credited sales volumes, 13% cited usual seasonal change, and 19% cited higher prices.

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.

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 April 2022.

LABOR MARKETS
Small businesses continue to struggle to find workers to fill open positions. Forty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from March. Forty percent have openings for skilled workers (up 1 point) and 22 percent have openings for unskilled labor (down 1 point). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and retail sectors. Openings are lowest in the agriculture and finance sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 20 percent planning to create new jobs in the next three months, unchanged from March. Fifty-five percent (93 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (changed). Thirty percent of owners reported few qualified applicants for their open positions (down 2 points) and 25 percent reported none (up 2 points). A number of factors can “disqualify” an applicant including lack of experience or social skills or appearance.

CAPITAL SPENDING
Fifty-four percent reported capital outlays in the last six months, down 2 points from March. A recovery in investment will be needed to spark an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions. Of those making expenditures, 40 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (down 3 points). Eight percent acquired new buildings or land for expansion (up 1 point) and 11 percent spent money for new fixtures and furniture (unchanged). Twenty-seven percent plan capital outlays in the next few months, up 1 point from March. 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 decreased 2 points from March’s record high reading to a net 70 percent seasonally adjusted. Unadjusted, 4 percent (up 1 point) reported lower average selling prices and 70 percent (down 1 point) reported higher average prices. Price hikes were most frequent in wholesale (85 percent higher, 0 percent lower), construction (81 percent higher, 3 percent lower), retail trades (76 percent higher, 4 percent lower), and manufacturing (70 percent higher, 3 percent lower). Seasonally adjusted, a net 46 percent plan price hikes (down 4 points).

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (down 2 points). Twenty-six percent reported all credit needs met (unchanged) and 61 percent said they were not interested in a loan (up 3 points). A net 4 percent reported their last loan was harder to get than in previous attempts (up 1 point). One percent reported that financing was their top business problem (unchanged). A net 16 percent of owners reported paying a higher rate on their most recent loan, up 7 points from March. The average rate paid on short maturity loans was 5.68 percent, down 0.38 percent from March. Twenty-six percent of all owners reported borrowing on a regular basis (up 1 point).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 46 percent reported raising compensation, down 3 points from March. A net 27 percent plan to raise compensation in the next three months, down 1 point from March. Eight percent cited labor costs as their top business problem and 23 percent said that labor quality was their top business problem (up 1 point). The frequency of reports of positive profit trends was a net negative 17 percent, unchanged from March. Among owners reporting lower profits, 34 percent blamed the rise in the cost of materials, 22 percent blamed weaker sales, 14 percent cited the usual seasonal change, 11 percent cited labor costs, 9 percent cited lower prices, and 2 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 51 percent credited sales volumes, 13 percent cited usual seasonal change, and 19 percent cited higher prices.

SALES AND INVENTORIES
Three percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 1 point from March. The net percent of owners expecting higher real sales volumes increased by 6 points to a net negative 12 percent. The net percent of owners reporting inventory increases increased 4 points to a net 4 percent. Not seasonally adjusted, 19 percent reported increases in stocks while 15 percent reported reductions. Thirty-six percent of owners report that supply chain disruptions have had a significant impact on their business (down 4 points). Another 34 percent report a moderate impact and 20 percent report a mild impact. Only 8 percent report no impact from recent supply chain disruptions. A net 6 percent of owners viewed current inventory stocks as “too low” in April, up 3 points from March. A net 1 percent of owners plan inventory investment in the coming months, down 1 point from March.

COMMENTARY
While inflation remains uppermost in the minds at the Federal Reserve, the “R” word (recession) has increasingly appeared in the prognostications of economists. Predictions have a recession starting as early as the third quarter of this year, although most guesses have 2023 for the start. The Fed announced a rate hike of half a point this month with more hikes to come in future meetings. Interesting side note, in the “old days” the Fed would raise rates between meeting if thought necessary, not something they’re likely to do this go around though. Under Paul Volcker, the Fed’s rate hit 20 percent, a long way from where we are today. If, historically, the Fed’s rate needs to be above inflation to be effective, we have a long way to go and the Fed is way behind the curve.

Small business owners continue to try to fill their record high levels of job openings but are finding it difficult. Labor supply is not responding strongly to their high wage offers. Job growth will continue opportunistically but not robustly as the available supply of workers is small. The impact of 10 percent inflation may induce some individuals not currently in the labor force to re-enter and take a job to ameliorate the impact of inflation on their standard of living. Gains in the range of 250,000-300,000 may be the best we can do for now.

Owners are very pessimistic about sales and business conditions in the second half of the year. This dampens capital investment and, eventually, will feed into employment if sales actually slow as expected. Financial markets have already made significant adjustments to changes in Fed policies and the uncertainties of war and Covid shutdowns that continue in China. More is likely to come as assets, financial and real estate, are highly overpriced. Trying to “catch up” runs a growing risk of “overshoot,” hopefully that won’t happen.