The NFIB Small Business Optimism Index increased 0.6 points in February to 90.9 but remains below the 49-year average of 98. Twenty-eight percent of owners reported inflation as their single most important business problem, up two points from last month. Owners expecting better business conditions over the next six months deteriorated two points from January to a net negative 47%.

“Small business owners remain doubtful that business conditions will get better in the coming months,” said NFIB Chief Economist Bill Dunkelberg. “They continue to struggle with historic inflation and labor shortages that are holding back growth. Despite their economic challenges, owners are working hard to create new jobs to strengthen the economy and their firms.”

Key findings include:

- Forty-seven percent of owners reported job openings that were hard to fill, remaining historically very high.
- The net percent of owners raising average selling prices decreased four points to a net 38% (seasonally adjusted).
- The net percent of owners who expect real sales to be higher improved five points from January to a net negative 9%.

As reported in NFIB’s monthly jobs report, 60% of owners reported hiring or trying to hire in February. Of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for their open positions.

Sixty percent of owners reported capital outlays in the last six months. Of those making expenditures, 40% reported spending on new equipment, 26% acquired vehicles, and 12% spent money for new fixtures and furniture. Eighteen percent of owners improved or expanded facilities and 6% acquired new buildings or land for expansion. Twenty-one percent plan capital outlays in the next few months.

A net negative 6% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down two points from January. The net percent of owners expecting higher real sales volumes improved five points to a net negative 9%.

The net percent of owners reporting inventory increases declined seven points to a net negative 1%. Not seasonally adjusted, 13% reported increases in stocks and 19% reported reductions.

Twenty percent of owners recently reported that supply chain disruptions still have a significant impact on their business. Another 33% reported a moderate impact and 34% reported a mild impact. Labor supply problems are widespread.

A net negative 4% of owners viewed current inventory stocks as “too low” in February, down three points. By industry, shortages are the most frequent in manufacturing (10%), construction (9%), finance (9%), and wholesale (9%). A net negative 7% of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices decreased four points from January to a net 38% (seasonally adjusted), the lowest since April 2021. Unadjusted, 12% of owners reported lower average selling prices and 50% reported higher average selling prices.

Price hikes were the most frequent in retail (64% higher, 9% lower), finance (63% higher, 16% lower), manufacturing (59% higher, 10% lower), and wholesale (57% higher, 9% lower). Seasonally adjusted, a net 25% plan price hikes.

Seasonally adjusted, a net 46% of owners reported raising compensation. A net 23% plan to raise compensation in the next three months. Twelve percent of owners cited labor costs as their top business problem and 21% said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 23%. Among the owners reporting lower profits, 23% blamed weaker sales, 23% blamed the rise in cost of materials, 17% cited the usual seasonal change, 13% cited labor costs, 10% cited lower prices, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 55% credited sales volumes, 14% cited higher prices, 13% cited usual seasonal change, and 5% cited lower labor costs.

Three percent of owners reported that 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 5% reported their last loan was harder to get than in previous attempts.

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 2023.

LABOR MARKETS
Forty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 2 points from January. Thirty-eight percent have openings for skilled workers (up 2 points) and 19 percent have openings for unskilled labor (up 2 points). The difficulty in filling open positions is particularly acute in the transportation, services, and construction sectors. Openings are lowest in the finance sector. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, down 2 points from January and 15 points below its record high reading of 32 reached in August 2021. For the past three months, the net percent of firms reporting higher employment has been positive. Before that, the survey reported 9 months of negatives, with more firms reporting reductions than gains. With larger firms laying off workers, small firms may be now finding more success in hiring. Overall, 60 percent reported hiring or trying to hire in February, up 3 points from January. Fifty-four percent (90 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 percent of owners reported few qualified applicants for their open positions (up 3 points) and 24 percent reported none (down 1 point).

CAPITAL SPENDING
Sixty percent reported capital outlays in the last six months, up 1 point from January. Of those making expenditures, 40 percent reported spending on new equipment (down 2 points), 26 percent acquired vehicles (up 2 points), and 12 percent spent money for new fixtures and furniture (up 1 point). Eighteen percent improved or expanded facilities (up 4 points) and 6 percent acquired new buildings or land for expansion (down 2 points). Twenty-one percent plan capital outlays in the next few months, unchanged from January and historically very weak.

INFLATION
The net percent of owners raising average selling prices decreased 4 points from January to a net 38 percent seasonally adjusted, the lowest since April 2021. Unadjusted, 12 percent (up 2 points) reported lower average selling prices and 50 percent (down 1 point) reported higher average prices. Price hikes were most frequent in retail (64 percent higher, 9 percent lower), finance (63 percent higher, 16 percent lower), manufacturing (59 percent higher, 10 percent lower), and wholesale (57 percent higher, 9 percent lower).

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 (up 2 points). A net 5 percent reported their last loan was harder to get than in previous attempts (down 1 point). Two percent reported that financing was their top business problem (down 1 point). A net 24 percent of owners reported paying a higher rate on their most recent loan, down 1 point from January. The average rate paid on short maturity loans was 7.9 percent, 0.3 percentage points above January and the highest level (also in November) since March 2008. Thirty percent of all owners reported borrowing on a regular basis (up 1 point).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 46 percent reported raising compensation, unchanged from January. A net 23 percent plan to raise compensation in the next three months, up 1 point from January. Twelve percent cited labor costs as their top business problem, up 2 points from January. Twenty-one percent said that labor quality was their top business problem (down 3 points). Labor quality remains in second place behind “inflation” by 7 points as the top business problem. The frequency of reports of positive profit trends was a net negative 23 percent, 3 points better than January. Among owners reporting lower profits, 23 percent blamed weaker sales, 23 percent blamed the rise in the cost of materials, 17 percent cited the usual seasonal change, 13 percent cited labor costs, 10 percent cited lower prices, and 3 percent cited higher taxes or regulatory costs.

SALES AND INVENTORIES
A net negative 6 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from January. The net percent of owners expecting higher real sales volumes improved 5 points to a net negative 9 percent. The net percent of owners reporting inventory increases declined 7 points to a net negative 1 percent. Not seasonally adjusted, 13 percent reported increases in stocks (down 4 points) and 19 percent reported reductions (up 2 points). Twenty percent of owners recently reported that supply chain disruptions still have a significant impact on their business (down 5 points). Another 33 percent reported a moderate impact (up 1 point) and 34 percent reported a mild impact (up 5 points). A net negative 4 percent of owners viewed current inventory stocks as “too low” in February, down 3 points from January. A net negative 7 percent of owners plan inventory investment in the coming months, up 1 point from January.

COMMENTARY
The much-anticipated recession has yet to make a meaningful appearance, if at all. None of the NFIB metrics are strong except job openings and hiring plans. However, firms have not been successfully filling open positions, with more firms reporting declines in total employment than gains in most of 2022. Very large firms are laying off thousands, yet the government is reporting large employment gains. Where? Maybe in small firms, as the net percent increasing employment has been positive for the past three months after 9 months of negative numbers.

Firms are aggressively raising prices, hard to do in a recession, suggesting that there is still a large pool of demand for goods and services. If a recession is coming (and small firms believe it is), it is rolling out at a very slow pace, perhaps because there is still a large pool of saved up stimulus money still swirling around in the economy supporting consumer spending. Or job security remains strong for most and therefore continued spending is low risk, probably a combination of both.

Inflation remains very persistent and three times the Fed’s target level. The incidence of price hikes among Main Street firms has peaked but remains historically very high. But, the incidence of compensation increases has barely declined, making it harder for firms to justify reducing prices, even if other input costs are falling. If a slowing economy forces firms to cut prices, the bottom-line situation worsens, revenues fall but wage costs do not. Historically, this leads to a reduction in employment and rising unemployment.

The Fed will continue to raise its policy rate, inflation is much too high. In a recent survey, 21 percent of small firms reported higher interest rates on loan payments and 33 percent said higher rates were slowing consumer spending. Higher borrowing costs are starting to bite, especially in the housing industry. Housing starts and home purchases are down significantly. Since mid-2021, reported average loan rates have risen from 5% to 8% (low compared to the record 19% in 1980) and the Fed reports that banks are tightening up on their lending standards. However, absent a significant reduction in consumer spending, dragging inflation down with rate hikes will take a lot of time.