The NFIB Optimism Index increased 2.9 points in June to 102.5, the first time the Index exceeded 100 since November 2020. Seven of the 10 Index components improved and three declined. The NFIB Uncertainty Index increased four points to 83.

“Small businesses optimism is rising as the economy opens up, yet a record number of employers continue to report that there are few or no qualified applicants for open positions,” said NFIB Chief Economist Bill Dunkelberg. “Owners are also having a hard time keeping their inventory stocks up with strong sales and supply chain problems.”

Other key findings include:

Owners expecting better business conditions over the next six months rose 14 points to a net negative 12%, an improvement but still in very negative territory.
Earnings trends over the past three months improved six points to a net negative 5%.
The net percent of owners raising average selling prices increased seven points to a net 47% (seasonally adjusted), the highest reading since January 1981.

As reported in NFIB’s monthly jobs report, 46% of owners reported job openings that could not be filled, a decrease of two points from May but still historically high and above the 48-historical average of 22%. Small employers have plans to fill open positions, job creation plans over the next three months rose to a net 28%, up one point.

Down from May’s report, 53% of owners reported capital outlays in the last six months. Of those making expenditures, 36% reported spending on new equipment, 23% acquired vehicles, and 14% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 11% spent money for new fixtures and furniture.

A net 9% of all owners (seasonally adjusted) reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes improved five points to a net 7%.

The net percent of owners reporting inventory increases rose 2 points to a net 1%. A net 11% of owners view current inventory stocks as “too low” in June, up three points from May and a historically high reading.

A record high reading, a net 11% of owners plan inventory investment in the coming months.

Unadjusted, 5% reported lower average selling prices and 54% reported higher average prices. Price hikes were the most frequent in wholesale (82% higher, 4% lower), retail (63% higher, 1% lower), and manufacturing (62% higher, 5% lower). Seasonally adjusted, a net 44% plan price hikes, up one point from May.

A net 39% (seasonally adjusted) reported raising compensation, a record high. A net 26% plan to raise compensation in the next three months.

Eight percent of owners cited labor costs as their top business concern and 26% said that labor quality was their top business problem, unchanged from May but remaining the top overall concern.

The frequency of reports of positive profit trends improved six points to a net negative 5%, driven primarily by the increase in sales. Among owners reporting lower profits, 35% blamed weaker sales, 25% cited a rise in the cost of materials, 9% cited labor costs, 9% cited lower prices, 8% cited the usual seasonal change, and 5% cited higher taxes or regulatory costs. For owners reporting higher profits, 66% credited sales volumes, 13% cited usual seasonal change, and 9% cited higher prices.

Three percent of owners reported that all of their borrowing needs were not satisfied. Twenty-five percent reported all credit needs were met and 59% said they were not interested in a loan. A net 2% reported that their last loan was harder to get than in previous attempts.

One percent of owners reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was 1%.

The average rate paid on short maturity loans was 4.9%, unchanged from May. Twenty-three percent of all owners reported borrowing on a regular basis.

LABOR MARKETS
Small businesses continue to struggle to find workers to fill open positions which are historically at record-high levels. Forty-six percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from May but still far above the 48-year historical average of 22 percent. Forty percent have openings for skilled workers (unchanged) and 22 percent have openings for unskilled labor (down 5 points). As the labor market tightens, a successful hire is often funded by a job loss at another firm, not a net increase in employment. An increase in labor force participation is needed to raise total employment or a decline in unemployment. Overall, 63 percent reported hiring or trying to hire in June, up 2 points from May. Owners’ plans to fill open positions continue, with a seasonally adjusted net 28 percent planning to create new jobs in the next three months, up 1 point from May. Job creation plans remain at record high levels. Many firms can’t hire enough workers to efficiently run their businesses, restricting sales and output. Fifty-six percent (89 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in June (down 1 point). Thirty-two percent of owners reported few qualified applicants for their open positions (unchanged) and 24 percent reported none (down 1 point).

CAPITAL SPENDING
Fifty-three percent reported capital outlays in the last six months, down 6 points from May. This is bad news for GDP growth but also for future productivity growth. Of those making expenditures, 36 percent reported spending on new equipment (down 8 points), 23 percent acquired vehicles (down 1 point), and 14 percent improved or expanded facilities (down 2 points). Six percent acquired new buildings or land for expansion (unchanged) and 11 percent spent money for new fixtures and furniture (down 2 points). Twenty-five percent plan capital outlays in the next few months, down 2 points from May. This is consistent with owner’s dismal view about the economy in the second half, bad news for capital spending and economic growth once we are past the impact of government spending and transfer payments.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 39 percent reported raising compensation (up 5 points), a record high. A net 26 percent plan to raise compensation in the next three months, up 4 points. Eight percent cited labor costs as their top business problem (unchanged) and 26 percent said that labor quality was their top business problem, unchanged from May but remaining the top overall concern. The frequency of reports of positive profit trends improved 6 points to a net negative 5 percent, driven primarily by the increase in sales. Among owners reporting lower profits, 35 percent blamed weaker sales, 25 percent cited a rise in the cost of materials, 9 percent cited labor costs, 9 percent cited lower prices, 8 percent cited the usual seasonal change, and 5 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 66 percent credited sales volumes, 13 percent cited usual seasonal change, and 9 percent cited higher prices.

CREDIT MARKETS
Three percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-five percent reported all credit needs met (up 2 points) and 59 percent said they were not interested in a loan (down 3 points). A net 2 percent reported their last loan was harder to get than in previous attempts (unchanged). One percent reported that financing was their top business problem (unchanged). The net percent of owners reporting paying a higher rate on their most recent loan was 1 percent, unchanged from May. Credit costs are at historically low levels. The average rate paid on short maturity loans was 4.9 percent, unchanged from May. Twenty-three percent of all owners reported borrowing on a regular basis (unchanged).

SALES AND INVENTORIES
A net 9 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 2 points from May. The net percent of owners expecting higher real sales volumes improved 5 points to a net 7 percent, surprising because owners were quite negative about future business conditions. The net percent of owners reporting inventory increases rose 2 points to a net 1 percent. Increasing stocks is difficult in the face of strong customer demand and supply chain problems. A net 11 percent of owners view current inventory stocks as “too low” in June, up 3 points from May and historically a record high. A net 11 percent of owners plan inventory investment in the coming months, up 5 points from May and a record high. Low inventories result in lost sales and owners plan to do their best to “stock up” to be able to satisfy customer demand.

INFLATION
The net percent of owners raising average selling prices increased 7 points to a net 47 percent, seasonally adjusted, the highest reading since January 1981. Unadjusted, 5 percent (unchanged) reported lower average selling prices and 54 percent (up 6 points) reported higher average prices. Price hikes were most frequent in wholesale (82 percent higher, 4 percent lower), retail (63 percent higher, 1 percent lower), and manufacturing (62 percent higher, 5 percent lower). Seasonally adjusted, a net 44 percent plan price hikes (up 1 point). The incidence of price hikes on Main Street is clearly on the rise as owners pass on rising labor and operating costs to their customers.

COMMENTARY
The economy is running “hot”, although at a slower pace. The New York Fed’s Weekly Economic Index (WEI), though high, has been trending down since May. Job growth has been solid, although total employment is still below 2020 peaks. Inflation is everywhere, but particularly strong in a number of critical industries. House prices have risen significantly. Although house prices are not included directly in the PCE or CPI price indices, they do affect the imputed measure of inflation for home owners which account for 20% to 40% of these indices.

Unemployment-related benefits are slowing as states opt out of the $300/week supplement. Significant reductions in payments will occur after September unless programs are renewed. This will likely slow consumption spending which has been the major driver of GDP growth. However, GDP will likely exceed its 2019 high by the end of the year, with heavy growth in sectors less labor intensive.

The services sector (restaurants, travel, gyms etc.) is making a strong recovery in employment as the economy opens up, but still more people are needed to fill vacant jobs. Small businesses often find themselves unable to hire enough workers to operate at full capacity. There are still about 9.5 million “unemployed” workers who are looking for a job. Yet record numbers of employers continue to complain that there are few or no qualified applicants for open positions. Matching the unemployed together with the firms that have an equal number of job openings would certainly help economic growth.

The Fed will start worrying about inflation as Main Street continues to raise selling prices, pushing the inflation measures up. Second quarter GDP growth will look good, around 5%. Unemployment will continue to be well about the 3.5% achieved in early 2020, but some progress will be made over the third quarter. 3 | NFIB Small Business Economic Trends Monthly Report