The NFIB Small Business Optimism Index declined 2.1 points in December to 89.8, marking the 12th consecutive month below the 49-year average of 98. Owners expecting better business conditions over the next six months worsened by eight points from November to a net negative 51%. Inflation remains the single most important business problem with 32% of owners reporting it as their top problem in operating their business.

“Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate,” said NFIB Chief Economist Bill Dunkelberg. “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.”

Key findings include:

- Forty-one percent of owners reported job openings that were hard to fill, down three points from November but historically very high.
- The net percent of owners raising average selling prices decreased eight points to a net 43% (seasonally adjusted), historically high.
- The net percent of owners who expect real sales to be higher worsened two points from November to a net negative 10%.

As reported in NFIB’s monthly jobs report, owners’ plans to add positions remain elevated, with a seasonally adjusted net 17% planning to create new jobs in the next three months. Overall, 55% of owners reported hiring or trying to hire in December. Ninety-three percent of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill.

Fifty-five percent of owners reported capital outlays in the last six months. Of those making expenditures, 37% reported spending on new equipment, 22% acquired vehicles, and 12% spent money for new fixtures and furniture. Eleven percent improved or expanded facilities and 4% acquired new buildings or land for expansion. Twenty-three percent of owners plan capital outlays in the next few months.

A net negative 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down one point from November. The net percent of owners expecting higher real sales volumes deteriorated two points to a net negative 10%.

The net percent of owners reporting inventory increases declined five points to a net 0%. Fifteen percent reported increases in stocks and 16% reported reductions. Twenty-three percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 30% reported a moderate impact and 32% reported a mild impact. Only 13% of owners reported 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.

A net 1% of owners viewed current inventory stocks as “too low” in December, up three points from November, overall a good balance. By industry, shortages are reported most frequently in manufacturing (13%), retail (12%), transportation (12%), and agriculture (11%). A net negative 4% of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices decreased eight points from November to a net 43% seasonally adjusted, the lowest level since May 2021. Unadjusted, 12% reported lower average selling prices and 51% reported higher average prices. Price hikes were the most frequent in wholesale (77% higher, 7% lower), manufacturing (60% higher, 4% lower), construction (59% higher, 8% lower), and transportation (59% higher, 6% lower). A net 24% (seasonally adjusted) of owners plan price hikes, down 10 points from November.

Seasonally adjusted, a net 44% of owners reported raising compensation. A net 27% plan to raise compensation in the next three months, down one point from November. Eight percent of owners cited labor costs as their top business problem and 23% said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 30%, down eight points from November. Among owners reporting lower profits, 30% blamed the rise in the cost of materials, 24% blamed weaker sales, 12% cited labor costs, 9% cited lower prices, 8% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 43% credited sales volumes, 18% cited higher prices, and 17% cited usual seasonal change.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-five percent reported all credit needs were met and 62% said they were not interested in a loan. However, loan interest rates have risen substantially, rising from an average of 5% in January, 2022 to 7.7% in December.

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 December 2022.

LABOR MARKETS 
Forty-one percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 3 points from November. Thirty-five percent have openings for skilled workers (down 2 points) and 16 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and transportation sectors. Owners’ plans to add positions remain elevated, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, down 1 point from November and 15 points below its record high reading of 32 reached in August 2021. Overall, 55 percent reported hiring or trying to hire in December, down 4 points from November. Fifty-one 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 (down 3 points). Twenty-six percent of owners reported few qualified applicants for their open positions (down 5 points) and 25 percent reported none (up 2 points).

CAPITAL SPENDING
Fifty-five percent reported capital outlays in the last six months, unchanged from November. Of those making expenditures, 37 percent reported spending on new equipment (down 2 points), 22 percent acquired vehicles (up 3 points), and 12 percent spent money for new fixtures and furniture (up 1 point). Eleven percent improved or expanded facilities (down 1 point) and 4 percent acquired new buildings or land for expansion (down 1 point). Twenty-three percent plan capital outlays in the next few months, down 1 point from November. Since January, the average interest rate paid on loans has risen from 5.0% to 7.7%.

INFLATION
The net percent of owners raising average selling prices decreased 8 points from November to a net 43 percent seasonally adjusted, the lowest since May 2021. Unadjusted, 12 percent (up 4 points) reported lower average selling prices and 51 percent (down 5 points) reported higher average prices. Price hikes were most frequent in wholesale (77 percent higher, 7 percent lower), manufacturing (60 percent higher, 4 percent lower), construction (59 percent higher, 8 percent lower), and transportation (59 percent higher, 6 percent lower). Seasonally adjusted, a net 24 percent plan price hikes (down 10 points).

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-five percent reported all credit needs met (up 3 points) and 62 percent said they were not interested in a loan (unchanged). A net 7 percent reported their last loan was harder to get than in previous attempts (up 2 points). Three percent reported that financing was their top business problem (unchanged and the highest since December 2018). A net 23 percent of owners reported paying a higher rate on their most recent loan, unchanged from November. The average rate paid on short maturity loans was 7.7 percent, only 0.2 percent below last month’s highest level since March 2008. Twenty-eight percent of all owners reported borrowing on a regular basis (up 1 point).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 44 percent reported raising compensation, up 4 points from November. A net 27 percent plan to raise compensation in the next three months, down 1 point from November. Eight percent cited labor costs as their top business problem, down 1 point from November, and 23 percent said that labor quality was their top business problem (up 2 points). Labor quality remains in second place behind “inflation” by 9 points as the top business problem. The frequency of reports of positive profit trends was a net negative 30 percent, down 8 points from November. Among owners reporting lower profits, 30 percent blamed the rise in the cost of materials, 24 percent blamed weaker sales, 12 percent cited labor costs, 9 percent cited lower prices, 8 percent cited the usual seasonal change, and 3 percent cited higher taxes or regulatory costs.

SALES AND INVENTORIES
A net negative 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 1 point from November. The net percent of owners expecting higher real sales volumes deteriorated 2 points to a net negative 10 percent. The net percent of owners reporting inventory increases declined 5 points to a net 0 percent. Not seasonally adjusted, 15 percent reported increases in stocks and 16 percent reported reductions. Twenty-three percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 30 percent reported a moderate impact and 32 percent reported a mild impact. Only 13 percent reported no impact from recent supply chain disruptions. A net 1 percent of owners viewed current inventory stocks as “too low” in December, up 3 points from November. A net negative 4 percent of owners plan inventory investment in the coming months.

COMMENTARY
The widely anticipated (predicted) recession did not arrive in 2022, but is still expected this year. The economy is clearly slowing, monthly job creation averaged 562,000 in 2021, but only 375,000 last year, with December closing the year at 223,000. Rising mortgage rates have clearly slowed the important housing sector, already suffering from shortages of materials and labor. The negative impact of the dramatic increase in interest rates has not been fully felt, and more rate hikes are almost certain early in the year. The unemployment rate is very low, but the labor force is smaller than it was pre-Covid.

Inflation remains well above the Fed’s 2% target, and the Fed is expected to raise rates again at its January meeting, though increases are expected to be smaller than those of 2022. Owners continue to call inflation their top business problem, lamenting the cost increases for their inputs (inventory, supplies, labor, energy, etc.) which compel them to raise their selling prices to cover the costs. In the most recent NFIB Covid-19 survey in December, owners still blamed rising input costs as the main cause, rather than labor costs (which will be the more stubborn costs to remediate). Sixty-eight percent cited input costs compared to 34% blaming compensation costs. When the cost of inputs like fuel or inventory fall, cutting selling prices is easy as owners try to attract more customers. But wages are very sticky, it’s hard to ask workers to take a cut so that selling prices can be reduced. And how all of this is impacted by higher interest rates is harder to figure out, including for Fed officials.

Overall, owners are not optimistic about 2023, sales and business conditions are expected to deteriorate. Owners will focus on their businesses, and do their best to deal with the fallout from all of the uncertainties in a year of slow growth and still-persistent inflation.