The NFIB Small Business Optimism Index decreased slightly in January to 97.1, down 1.8 points from December. Inflation remains a problem for small businesses as 22% of owners reported that inflation was their single most important business problem, unchanged from December when it reached the highest level since 1981. The net percent of owners raising average selling prices increased four points to a net 61% (seasonally adjusted), the highest reading since the fourth quarter of 1974.

“More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,” said NFIB Chief Economist Bill Dunkelberg. “In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.”

Key findings include:

- One of the Index components improved, seven declined, and two were unchanged.
- Owners expecting better business conditions over the next six months increased two points to a net negative 33%. Small business owners remain pessimistic about future economic conditions as this indicator has declined 13 points over the past six months.
- Forty-seven percent of owners reported job openings that could not be filled, a decrease of two points from December.
- Inventory accumulation plans fell five percentage points.

As reported in NFIB’s monthly jobs report, a net 50% (seasonally adjusted) reported raising compensation, a 48-year record high reading. A net 27% plan to raise compensation in the next three months. Eleven percent of owners cited labor costs as their top business problem and 23% said that labor quality was their top business problem.

Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 26% planning to create new jobs in the next three months, down two points from December and just six points below the highest reading in the 48-year history of the survey set in August.

Fifty-eight percent of small business owners reported capital outlays in the last six months, up one point from December. Of those owners making expenditures, 40% reported spending on new equipment, 22% acquired vehicles, 15% improved or expanded facilities, 8% acquired new buildings or land for expansion, and 15% spent money for new fixtures and furniture. Twenty-nine percent of owners plan capital outlays in the next few months, unchanged from December and two points higher than the 48-year average.

Seasonally adjusted, 2% of all owners reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes decreased by six points to a net negative 3%.

The net percent of owners reporting inventory change increased two points to a net 9%. Eighteen percent reported increases in stocks while 15% reported reductions. Thirty-six percent of owners report that supply chain disruptions have had a significant impact on their business. Another 32% report a moderate impact and 22% report a mild impact. Only 9% report no impact from recent supply chain disruptions. A net 7% of owners viewed current inventory stocks as “too low” in January, down two points. A net 3% of owners plan inventory investment in the coming months, down five points from December, reflecting the success in inventory building in the fourth quarter.

The net percent of owners raising average selling prices increased four points to a net 61% (seasonally adjusted), the highest reading since the fourth quarter of 1974. Price raising activity over the past 12 months has continued to escalate, reaching levels not seen since the early 1980s.

Five percent of owners reported lower average selling prices and 62% reported higher average prices. Price hikes were the most frequent in wholesale (88% higher, 3% lower), manufacturing (71% higher, 1% lower), retail (69% higher, 4% lower), and construction (67% higher, 5% lower). Seasonally adjusted, a net 47% of owners plan price hikes.

The frequency of reports of positive profit trends decreased three points to a net negative 17%. Among the owners reporting lower profits, 32% blamed the rise in the cost of materials, 19% blamed weaker sales, 9% cited labor costs, 18% cited the usual seasonal change, 7% cited lower prices, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 63% credited sales volumes, 12% cited usual seasonal change, and 13% cited higher prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-five percent reported all credit needs met and 62% said they were not interested in a loan. A net 2% reported their last loan was harder to get than in previous attempts. One percent reported that financing was their top business problem. A net 4% of owners reported paying a higher rate on their most recent 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. The survey was conducted in January 2022.

LABOR MARKETS
Forty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill, down 2 points from December. Thirty-six percent have openings for skilled workers (down 3 points) and 22 percent have openings for unskilled labor (unchanged). Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 26 percent planning to create new jobs in the next three months, down 2 points from December and just 6 points below the highest reading in the 48-year history of the survey set in August. 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 (down 2 points). Twenty-nine percent of owners reported few qualified applicants for their open positions (down 2 points) and 26 percent reported none (unchanged).

CAPITAL SPENDING
Fifty-eight percent reported capital outlays in the last six months, up 1 point from December. 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 (down 1 point), 22 percent acquired vehicles (down 3 points), and 15 percent improved or expanded facilities (down 4 points). Eight percent acquired new buildings or land for expansion (up 2 points) and 15 percent spent money for new fixtures and furniture (up 2 points). Twenty-nine percent plan capital outlays in the next few months, unchanged from December. This is 2 points higher than the 48-year average. A more positive view of the future economy and economic policy would help stimulate longer term investment spending..

INFLATION
The net percent of owners raising average selling prices increased 4 points to a net 61 percent seasonally adjusted, the highest reading since Q4 1974. Unadjusted, 5 percent (unchanged) reported lower average selling prices and 62 percent (up 4 points) reported higher average prices. Price hikes were most frequent in wholesale (88 percent higher, 3 percent lower), manufacturing (71 percent higher, 1 percent lower), retail (69 percent higher, 4 percent lower), and construction (67 percent higher, 5 percent lower). Seasonally adjusted, a net 47 percent plan price hikes (down 2 points).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 50 percent reported raising compensation, up 2 points from December and a 48-year record high reading. A net 27 percent plan to raise compensation in the next three months, down 5 points from December, but historically high. Eleven percent cited labor costs as their top business problem, down 2 points from December’s 48-year record high reading, and 23 percent said that labor quality was their top business problem (down 2 points). The frequency of reports of positive profit trends decreased 3 points to a net negative 17 percent.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-five percent reported all credit needs met (down 1 point) and 62 percent said they were not interested in a loan (unchanged). A net 2 percent reported their last loan was harder to get than in previous attempts (down 2 points). One percent reported that financing was their top business problem (up 1 point). A net 4 percent of owners reported paying a higher rate on their most recent loan, unchanged from December. The average rate paid on short maturity loans was 5.02 percent, down 0.28 points from December. Twenty-three percent of all owners reported borrowing on a regular basis (unchanged).

SALES AND INVENTORIES
Two percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 1 point from December. The net percent of owners expecting higher real sales volumes decreased by 6 points to a net negative 3 percent. The net percent of owners reporting inventory change increased 2 points to a net 9 percent. Not seasonally adjusted, 18 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 (unchanged). Another 32 percent report a moderate impact and 22 percent report a mild impact. Only 9 percent report no impact from recent supply chain disruptions. A net 7 percent of owners viewed current inventory stocks as “too low” in January, down 2 points from December. A net 3 percent of owners plan inventory investment in the coming months.

COMMENTARY
In October 2020, the percent of owners raising their selling prices jumped 8 percentage points over July (the prior quarter) to 23 percent, reaching the highest level seen since 1982. Three months later, January 2021, reports of higher prices rose another 4 points to 27 percent. In April, the percent raising prices rose to 45, an 8-point increase. Then 52 percent in July, 57 percent in October, and 62 percent in January this year. The adds up to a 47 percentage points increase from July 2020, the start of the surge in prices. Hello? The Federal Reserve noticing the spread of price increases in the small business sector, a rather large and important segment of the economy, was slow to react. As this was happening, the Fed was and still is pursuing an expansive monetary policy rather than beginning to inoculate the economy against the inflation virus that is spreading aggressively.

Compensation was also raising a red flag, reaching 48-year record high reports of increased labor compensation. Reports of price increases closely tracked reports of higher compensation, hinting at a wage-price inflation spiral. Virus-related shortages and the massive dump of free money has also played a part, supporting a surge in income not related to production of goods and services. It’s a complex picture, especially with the Federal Reserve and the Administration keeping their foot on the accelerator.

Going forward, it is likely that the Administration will not be able to pass any new spending bill in the near future. This will help. The Fed will have to acknowledge that inflation has spread like Omicron, and it will have to act by raising interest rates to depress spending, cease buying securities, and instead shrinking its expansive portfolio. This will not be well received by financial markets. Absent strong inventory growth in the first quarter, economic growth will fall back to the 2% level and employment growth will probably slow. Inflation will remain stubbornly high this year, but should slow down in the second half of the year as some of the economic disruptions get untangled.