The NFIB Small Business Optimism Index decreased in March by 2.4 points to 93.2, the third consecutive month below the 48-year average of 98. Thirty-one percent of owners reported that inflation was the single most important problem in their business, up five points from February and the highest reading since the first quarter of 1981. Inflation has now replaced “labor quality” as the number one problem.

“Inflation has impacted small businesses throughout the country and is now their most important business problem,” said NFIB Chief Economist Bill Dunkelberg. “With inflation, an ongoing staffing shortage, and supply chain disruptions, small business owners remain pessimistic about their future business conditions.”

Key findings include:
- Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-old survey.
- Forty-seven percent of owners reported job openings that could not be filled, a decrease of one point from February.
- The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading in the survey’s history.

The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading recorded in the series. Unadjusted, three percent of owners reported lower average selling prices and 71% reported higher average prices.

Price hikes were the most frequent in wholesale (84% higher, 0% lower), construction (83% higher, 3% lower), agriculture (78% higher, 2% lower), and retail sales (77% higher, 2% lower). Seasonally adjusted, a net 50% of owners plan price hikes, up four points from February.

As reported in NFIB’s monthly jobs report, a net 20% of owners are planning to create new jobs in the next three months, up one point from February. The difficulty in filling open positions is particularly acute in the transportation, construction, and manufacturing sectors where many positions require skilled workers. Openings are lowest in the finance and agriculture sectors.

A net 49% (seasonally adjusted) reported raising compensation, down one point from January’s 48-year record high reading. A net 28% plan to raise compensation in the next three months, up two points from February. Eight percent of owners cited labor costs as their top business problem and 22% said that labor quality was their top business problem, now in second place following “inflation.”

Fifty-six percent reported capital outlays in the last six months, down one point from February. Of those making expenditures, 38% reported spending on new equipment, 22% acquired vehicles, and 17% improved or expanded facilities. Seven percent of owners acquired new buildings or land for expansion and 11% spent money for new fixtures and furniture. Twenty-six percent of owners plan capital outlays in the next few months.

Four percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up four points from February. The net percent of owners expecting higher real sales volumes decreased by 12 points to a net negative 18%.

The net percent of owners reporting inventory increases fell five points to a net 0%. Not seasonally adjusted, 18% reported increases in stocks while 21% reported reductions.

Forty percent of owners report that supply chain disruptions have had a significant impact on their business, up three points. Another 28% report a moderate impact and 23% report a mild impact. Only 8% report no impact from recent supply chain disruptions.

A net 9% of owners viewed current inventory stocks as “too low” in March, up two points from February. A net 2% of owners plan inventory investment in the coming months, unchanged from last month and reflecting the success in inventory building in the fourth quarter.

The frequency of reports of positive profit trends was a net negative 17%. Among the owners reporting lower profits, 35% blamed the rise in the cost of materials, 23% blamed weaker sales, 14% cited the usual seasonal change, 13% cited labor costs, 7% cited lower prices, and 2% cited higher taxes or regulatory costs. For owners reporting higher profits, 55% credited sales volumes, 17% cited usual seasonal change, and 17% cited higher prices.

Four percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs met and 58% said they were not interested in a loan. A net 3% reported their last loan was harder to get than in previous attempts.

One percent of owners reported that financing was their top business problem. A net 9% of owners reported paying a higher rate on their most recent loan, up three points from February and likely moving higher as the Federal Reserve raises interest rates.

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 March 2022.

LABOR MARKETS
Forty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 1 point from February. The number of unfilled job openings remains far above the 48-year historical average of 23 percent. Thirty-nine percent have openings for skilled workers (up 2 points) and 23 percent have openings for unskilled labor (down 2 points). The difficulty in filling open positions is particularly acute in the transportation, construction, and manufacturing sectors where many positions require skilled workers. Openings are lowest in the finance and agriculture 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, up 1 point from February. Fifty-five percent (92 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 2 points). Thirty-two percent of owners reported few qualified applicants for their open positions (up 1 point) and 23 percent reported none (down 3 points).

CAPITAL SPENDING
Fifty-six percent reported capital outlays in the last six months, down 1 point from February. 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, 38 percent reported spending on new equipment (down 3 points), 22 percent acquired vehicles (up 1 point), and 17 percent improved or expanded facilities (up 3 points). Seven percent acquired new buildings or land for expansion (unchanged) and 11 percent spent money for new fixtures and furniture (unchanged). Twenty-six percent plan capital outlays in the next few months, down 1 point from February. 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.

INFLATION
The net percent of owners raising average selling prices increased 4 points to a net 72 percent seasonally adjusted, the highest reading recorded in the series. Unadjusted, 3 percent (down 1 point) reported lower average selling prices and 71 percent (up 3 points) reported higher average prices. Price hikes were most frequent in wholesale (84 percent higher, 0 percent lower), construction (83 percent higher, 3 percent lower), agriculture (78 percent higher, 2 percent lower), and retail trades (77 percent higher, 2 percent lower). Seasonally adjusted, a net 50 percent plan price hikes (up 4 points).

CREDIT MARKETS
Four percent of owners reported that all their borrowing needs were not satisfied (up 2 points). Twenty-six percent reported all credit needs met (up 1 point) and 58 percent said they were not interested in a loan (down 2 points). A net 3 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 (up 1 point). A net 9 percent of owners reported paying a higher rate on their most recent loan, up 3 points from February. The average rate paid on short maturity loans was 5.68 percent, unchanged from February. Twenty-five percent of all owners reported borrowing on a regular basis (up 2 points).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 49 percent reported raising compensation, down 1 point from January’s 48-year record high reading. A net 28 percent plan to raise compensation in the next three months, up 2 points from February. Eight percent cited labor costs as their top business problem and 22 percent said that labor quality was their top business problem (unchanged), now in second place behind “inflation.” The frequency of reports of positive profit trends was a net negative 17 percent, unchanged from February. Among owners reporting lower profits, 35 percent blamed the rise in the cost of materials, 23 percent blamed weaker sales, 14 percent cited the usual seasonal change, 13 percent cited labor costs, 7 percent cited lower prices, and 2 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 55 percent credited sales volumes, 17 percent cited usual seasonal change, and 17 percent cited higher prices.

SALES AND INVENTORIES
Four percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 4 points from February. The net percent of owners expecting higher real sales volumes decreased by 12 points to a net negative 18 percent. The net percent of owners reporting inventory increases fell 5 points to a net zero percent. Not seasonally adjusted, 18 percent reported increases in stocks while 21 percent reported reductions. Forty percent of owners report that supply chain disruptions have had a significant impact on their business (up 3 points). Another 28 percent report a moderate impact and 23 percent report a mild impact. Only 8 percent report no impact from recent supply chain disruptions. A net 9 percent of owners viewed current inventory stocks as “too low” in March, up 2 points from February. A net 2 percent of owners plan inventory investment in the coming months.

COMMENTARY
The top story in today’s economy is about inflation. Its cause is an imbalance between demand (supported in part by stimulus payments) and supply (adversely impacted by the virus, related government policies, and shifts in consumer spending). Energy prices are a major driver of the inflation we are now experiencing, now running at 8 percent. The Administration’s anti-inflation policy is to release a million barrels of oil a day for six months from our strategic reserve. This will provide less than 2 percent of world consumption, not a big price changer, but should help. And, the government will replace that oil at prices much higher than it paid for the oil it releases. Oil is about $100 a barrel now, it was around $50 a year ago. While the war in Ukraine is contributing to increase oil prices, oil prices were rising well before the invasion due to government policies that restricted domestic production. The U.S. has fallen from the top oil producer to third place, behind Russia and Saudi Arabia. Venezuela has the largest known reserves but can’t get its socialist economy running to exploit them.

Energy is not our only problem, however. Shortages of many things are widespread, including labor. Employment is growing but remains 1 percent below 2020 high levels and the labor force participation rate is 1 percentage point lower. Job openings are at record high levels but filling them is difficult, even with compensation rising solidly. Houses are in short supply, prices up 20 percent over last year. Fertilizer is also in short supply and very pricey, contributing to rising food costs. Producers are putting less stuff in the box you buy at the same or higher price. Inflation has spread faster and more widely than the virus. It infects everyone.

The Federal Reserve will combat inflation by raising interest rates, probably sharply but they are a bit late in getting started. This will slow spending in the economy (historically a “recession”) to reduce the pressure on prices. Government spending will also slow. Unemployment will rise, uncomfortable for politicians and also the Federal Reserve which has “full employment” as one of its two policy goals. Small business owners see all this coming. Their expectations for sales growth and business conditions later this year are in the tank. In the meantime, there are still opportunities to make a buck, if supply problems can be overcome.