The NFIB Small Business Optimism Index increased slightly in December to 98.9, up 0.5 points from November. Twenty-two percent of small business owners reported that inflation was their single most important problem encountered in operating their business. Price raising activities has reached levels not seen since the early 1980’s when prices were rising at double digit rates.

“Small businesses unfortunately saw a disappointing December jobs report, with staffing issues continuing to impact their ability to be fully productive,” said NFIB Chief Economist Bill Dunkelberg. “Inflation is at the highest level since the 1980’s and is having an overwhelming impact on owners’ ability to manage their businesses.”

Key findings include:

Twenty-two percent report inflation as the single most important problem operating their business, a 20-point increase from the beginning of 2021 and the highest level since Q4 1981.
Owners expecting better business conditions over the next six months increased three points to a net negative 35%. Owners remain pessimistic about future economic conditions as this indicator has declined 23 points over the past six months.
Forty-nine percent of owners reported job openings that could not be filled, an increase of one point from November.

According to NFIB’s monthly jobs report, a net 48% (seasonally adjusted) of owners reported raising compensation, up four points from November and a 48-year record high reading. A net 32% plan to raise compensation in the next three months. Thirteen percent cited labor costs as their top business problem, up three points and a 48-year record high reading and 25% said that labor quality was their top business problem.

Fifty-seven percent of owners reported capital outlays in that last six months, up two points from November. Of those making expenditures, 41% reported spending on new equipment, 25% acquired new vehicles, and 19% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 13% spent money for new fixtures and furniture. Twenty-nine percent plan capital outlays in the next few months, up two points from November and two points higher than the 48-year average.

A net 1% of all owners (seasonally adjusted) reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes increased by one point to a net 3%.

The net percent of owners reporting inventory change increased four points to a net 7%. Thirty-six percent of owners report that supply chain disruptions have had a significant impact on their business. Another 30% report a moderate impact and 21% report a mild impact. Only 11% report no impact from recent supply chain disruptions.

A net 9% of owners viewed current inventory stocks as “too low” in December, down six points from November. A net 8% of owners plan inventory investment in the coming months, down two points from November but five points above the 48-year historical average.

The net percent of owners raising average selling prices decreased two points to a net 57% (seasonally adjusted). Unadjusted, 5% of owners reported lower average selling prices and 58% reported higher average prices. Price hikes were the most frequent in wholesale (85% higher, 0% lower), construction (74% higher, 5% lower), and retail (70% higher, 7% lower). Seasonally adjusted, a net 49% plan price hikes (down five points).

The frequency of reports of positive profit trends increased three points to a net negative 14%. Among the owners reporting lower profits, 29% blamed the rise in the cost of materials, 22% blamed weaker sales, 17% cited labor costs, 10% cited the usual seasonal change, 8% cited lower prices, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 63% credited sales volumes, 11% cited usual seasonal change, and 15% cited higher prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs met and 62% said they were not interested in a loan. A net 4% reported that their last loan was harder to get than in previous attempts. Zero 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 December 2021.

LABOR MARKETS
Forty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from November. 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 (down 2 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 28 percent planning to create new jobs in the next three months, up 3 points from November and just 4 points below the highest reading in the 48-year history of the survey set in August. Fifty-seven percent (95 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 1 point). Thirty-one percent of owners reported few qualified applicants for their open positions (up 1 point) and 26 percent reported none (unchanged).

CAPITAL SPENDING
Fifty-seven percent reported capital outlays in the last six months, up 2 points from November. 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. Among the very largest firms, spending on equipment has picked up. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 25 percent acquired vehicles (up 3 points), and 19 percent improved or expanded facilities (up 5 points). Six percent acquired new buildings or land for expansion (unchanged) and 13 percent spent money for new fixtures and furniture (unchanged). Twenty-nine percent plan capital outlays in the next few months, up 2 points from November. 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 decreased 2 points to a net 57 percent seasonally adjusted. Unadjusted, 5 percent (up 2 points) reported lower average selling prices and 58 percent (up 1 point) reported higher average prices. Price hikes were most frequent in wholesale (85 percent higher, 0 percent lower), construction (74 percent higher, 5 percent lower), and retail (70 percent higher, 7 percent lower). Seasonally adjusted, a net 49 percent plan price hikes (down 5 points).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 48 percent reported raising compensation, up 4 points from November and a 48-year record high reading. A net 32 percent plan to raise compensation in the next three months, unchanged from November’s record high reading. Thirteen percent cited labor costs as their top business problem, up 3 points and a 48- year record high reading and 25 percent said that labor quality was their top business problem (down 4 points). The frequency of reports of positive profit trends increased 3 points to a net negative 14 percent. Among owners reporting lower profits, 29 percent blamed the rise in the cost of materials, 22 percent blamed weaker sales, 17 percent cited labor costs, 10 percent cited the usual seasonal change, 8 percent cited lower prices, and 4 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 63 percent credited sales volumes, 11 percent cited usual seasonal change, and 15 percent cited higher prices.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-six percent reported all credit needs met (up 3 points) and 62 percent said they were not interested in a loan (down 3 points). A net 4 percent reported their last loan was harder to get than in previous attempts (up 3 points). Zero percent reported that financing was their top business problem (unchanged). A net 4 percent of owners reported paying a higher rate on their most recent loan, up 2 points from November. The average rate paid on short maturity loans was 5.3 percent, up 0.2 points from November. Twenty-three percent of all owners reported borrowing on a regular basis (up 2 points).

SALES AND INVENTORIES
One percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 3 points from November. The net percent of owners expecting higher real sales volumes increased by 1 point to a net 3 percent. The net percent of owners reporting inventory change increased 4 points to a net 7 percent. Thirty-six percent of owners report that supply chain disruptions have had a significant impact on their business (up 1 point). Another 30 percent report a moderate impact and 21 percent report a mild impact. Only 11 percent report no impact from recent supply chain disruptions. A net 9 percent of owners viewed current inventory stocks as “too low” in December, down 6 points from November. A net 8 percent of owners plan inventory investment in the coming months, down 2 points from November.

COMMENTARY
2022 looks like another year to be dominated by the virus. Over 20,000 flight cancellations over the holidays, many left in 2021 expecting to be home in the same year, but for some this was not the case. Supply side problems, mostly staffing issues were the culprit. December job creation disappointed, coming in under 200,000. According to NFIB members, this is due to record levels of few or no qualified applicants for open positions. This squares with the decline in the unemployment rate to 3.9%, the lowest level since February 2020 at 3.5% and that was the lowest in 50 years. It was not hard to get a job if you wanted one just prior to the pandemic, but also now. However, the recent surge in Covid infections will certainly discourage some from joining the labor force which would ease some of the current small business staffing shortage challenges.

The outlook for the economy near-term must be pretty good as the demand for labor and for inventories is at historic high levels, obviously needed to take advantage of current sales opportunities. But the outlook for the economy in the first half of 2022 is quite negative, in part due to the policy confusion in Washington and in 50 states over Covid and potential tax increases.

The Federal Reserve has also added a lot of uncertainty to the outlook, indicating that it will abandon its bond buying program and start raising interest rates. Recall that the prime rate of interest hit 20% in the early 1980s in that fight against inflation. Today it is at 3.5% and small businesses have been paying historically low interest rates on loans for years. That is about to change, albeit to a lesser degree than 60 years ago, but financial markets will still have a fit, because record high asset prices (the Dow hit new highs recently) depend on record low interest rates (a 10-year Treasury bond yielding about 1% to savers). This reconfiguration could make for another turbulent year.