In February, the NFIB Optimism Index decreased by 1.4 points to 95.7, the second consecutive month below the 48-year average of 98. Twenty-six percent of owners reported that inflation was their single most important problem in operating their business, a four-point increase since December and the highest reading since the third quarter of 1981.

“Inflation continues to be a problem on Main Street, leading more owners to raise selling prices again in February,” said NFIB Chief Economist Bill Dunkelberg. “Supply chain disruptions and labor shortages also remain problems, leading to lower earnings and sales for many.”

Key findings include:

- The net percent of owners raising average selling prices increased seven points to a net 68% (seasonally adjusted), a 48-year record high reading.
- Owners expecting better business conditions over the next six months decreased two points to a net negative 35%.
- Forty-eight percent of owners reported job openings that could not be filled, an increase of one point from January.
- Inventory accumulation plans fell one percentage point, following a five-point decline in January, following the massive inventory build in Q4.

Price raising activity over the past 12 months has continued to escalate, reaching levels not seen since the early 1980s when prices were rising at double-digit rates. Unadjusted, 4% of owners reported lower average selling prices and 68% reported higher average prices. Price hikes were the most frequent in retail (79% higher, 4% lower), wholesale (77% higher, 4% lower), construction (73% higher, 3% lower), and manufacturing (72% higher, 6% lower). Seasonally adjusted, a net 46% of owners plan price hikes.

As reported last week in NFIB’s monthly jobs report, 48% of all owners reported job openings they could not fill in the current period. Ninety-three percent of owners hiring or trying to hire reported few or no qualified applicants for their open positions.

Fifty-seven percent of owners reported capital outlays in the last six months, down one point from January. Of those owners making expenditures, 41% reported spending on new equipment, 21% acquired vehicles, and 14% improved or expanded facilities. Seven 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, down two points from January.

Seasonally adjusted, a net 0% of all owners reported higher nominal sales in the past three months, down two points from January. The net percent of owners expecting higher real sales volumes decreased three points to a net negative 6%.

The net percent of owners reporting inventory increases fell four points to a net 5%, a historically strong figure. Eighteen percent of owners reported increases in stocks while 18% reported reductions.

Thirty-seven percent of owners report that supply chain disruptions have had a significant impact on their business. Another 33% report a moderate impact and 21% report a mild impact. Only 8% of owners report no impact from the recent supply chain disruptions.

A net 7% of owners viewed current inventory stocks as “too low” in February, unchanged from last month. A net 2% of owners plan inventory investment in the coming months.

Seasonally adjusted, a net 45% of owners reported raising compensation, down five points from January’s 48-year record high reading. A net 26% of owners plan to raise compensation in the next three months. Eleven percent of owners cited labor costs as their top business problem and 22% said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 17%. Among owners reporting lower profits, 28% blamed the rise in the cost of materials, 28% blamed weaker sales, 8% cited labor costs, 15% cited the usual seasonal change, 7% cited lower prices, and 1% cited higher taxes or regulatory costs. For owners reporting higher profits, 50% credited sales volumes, 18% cited usual seasonal change, and 17% cited higher prices explicity.

Two percent of owners reported that all of their borrowing needs were not satisfied. Twenty-five percent reported all credit needs met and 60% said they were not interested in a loan. A net 2% reported their last loan was harder to get than in previous attempts. Zero percent reported that financing was their top business problem. A net 6% of owners reported paying a higher rate on their most recent loan, up two points from January.

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 February 2022.

LABOR MARKETS
Forty-eight percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from January. The number of unfilled job openings remains far above the 48-year historical average of 23 percent. Thirty-seven percent have openings for skilled workers (up 1 point) and 25 percent have openings for unskilled labor (up 3 points). The difficulty in filling open positions is particularly acute in the transportation, construction, and wholesale sectors where many positions require skilled workers. Openings are lowest in the finance and agriculture sectors. Owners’ plans to fill open positions remain elevated but easing, with a seasonally adjusted net 19 percent planning to create new jobs in the next three months, down 7 points from January. Fifty-seven 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 (up 2 points). Thirty-one percent of owners reported few qualified applicants for their open positions (up 2 points) and 26 percent reported none (unchanged).

CAPITAL SPENDING
Fifty-seven percent reported capital outlays in the last six months, down 1 point from January. 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, 41 percent reported spending on new equipment (up 1 point), 21 percent acquired vehicles (down 1 point), and 14 percent improved or expanded facilities (down 1 point). Seven percent acquired new buildings or land for expansion (down 1 point) and 11 percent spent money for new fixtures and furniture (down 4 points). Twenty-seven percent plan capital outlays in the next few months, down 2 points from January. 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 7 points to a net 68 percent seasonally adjusted, the highest reading recorded in the series. Unadjusted, 4 percent (down 1 point) reported lower average selling prices and 68 percent (up 6 points) reported higher average prices. Price hikes were most frequent in retail (79 percent higher, 4 percent lower), wholesale (77 percent higher, 4 percent lower), construction (73 percent higher, 3 percent lower), and manufacturing (72 percent higher, 6 percent lower). Seasonally adjusted, a net 46 percent plan price hikes (down 1 point).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 45 percent reported raising compensation, down 5 points from January’s 48-year record high reading. A net 26 percent plan to raise compensation in the next three months, down 1 point from January, but historically high. Eleven percent cited labor costs as their top business problem, unchanged from January’s 48-year record high reading, and 22 percent said that labor quality was their top business problem (down 1 point). The frequency of reports of positive profit trends was a net negative 17 percent, unchanged from January.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-five percent reported all credit needs met (unchanged) and 60 percent said they were not interested in a loan (down 2 points). A net 2 percent reported their last loan was harder to get than in previous attempts (unchanged). Zero percent reported that financing was their top business problem (down 1 point). A net 6 percent of owners reported paying a higher rate on their most recent loan, up 2 points from January. The average rate paid on short maturity loans was 5.68 percent, down 0.66 points from January.” Twenty-three percent of all owners reported borrowing on a regular basis (unchanged).

SALES AND INVENTORIES
A net zero percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from January. Over 60 percent of owners are experiencing lost sales opportunities. The net percent of owners expecting higher real sales volumes decreased by 3 points to a net negative 6 percent. The net percent of owners reporting inventory increases fell 4 points to a net 5 percent, an historically strong figure. Not seasonally adjusted, 18 percent reported increases in stocks while 18 percent reported reductions. Thirty-seven percent of owners report that supply chain disruptions have had a significant impact on their business (up 1 point). Another 33 percent report a moderate impact and 21 percent report a mild impact. Only 8 percent report no impact from recent supply chain disruptions. A net 7 percent of owners viewed current inventory stocks as “too low” in February, unchanged from January. A net 2 percent of owners plan inventory investment in the coming months, down 1 point from January.

COMMENTARY
Here’s a simplified description of events that led up to the current period. In early 2020, the economy was smacked by Covid. With no medicines and little experience in treating the virus, many died. To thwart the spread of the virus, government shut down all non-essential businesses. With millions of workers deprived of an income, the government mailed them checks and generous unemployment benefits. Flush with money, they went on a spending spree, focused on goods, not services since “foot traffic” businesses were not safe, but the internet was, heavily relying on “essential” delivery services.

The usual way we get money is to make and sell something or provide a service, creating output that consumers buy. But this time, millions of people were not working but got the money anyways and to no surprise, they spent it, especially on goods because the virus shut down a lot of the service sector. Domestic firms were short on goods, so imports rose significantly, some of it piled up on ships waiting to unload in overworked ports. All that money chasing too few goods created inflation. The Federal Reserve contributed to the problem by keeping interest rates at absurdly low levels, so consumers and businesses had access to very cheap money, borrowed it, and spent it. This spending included real estate thus a 20% increase in house prices last year with very low mortgage rates spurring demand for example.

Shortages of goods and materials created an environment of price hikes. Indeed, a record high percentage of owners report raising compensation and a slightly larger percentage report raising selling prices. President Biden’s State of Union Address offered his solution to our problems: “lower your costs, not your wages.” For so many firms, labor costs are the largest cost in their business. Compensation has been rising at a favorable rate, but not as fast as inflation, so real wages are not rising as much.

The solution to many of these problems is to let private sector firms solve them in response to market signals like prices and profits. Rising prices are signals to resources to invest there, increase supply, and solve the rising price problem with increased supply (high oil prices have resulted in a sharp increase in the number of rigs producing oil for example). Eliminating regulations that impact important prices is also important. The Federal Reserve sets interest rates, not financial markets, minimum wage regulations reduce employment opportunities, if we tax something, we will get less of it. Programs that simply give people more money won’t help and the government has no more money to give unless it taxes or borrows from the private sector. Let Main Street work, that’s the most effective way to resolve these challenges.