The NFIB Optimism Index fell 0.1 points in May to 93.1, marking the fifth consecutive month below the 48-year average of 98. Owners expecting better business conditions over the next six months decreased four points to a net negative 54%, the lowest level recorded in the 48-year-old survey. Expectations for better business conditions have deteriorated every month since January.

Twenty-eight percent of owners reported inflation was their single most important problem in operating their business, a decrease of four points from April. The net percent of owners raising average selling prices increased two points to a net 72% (seasonally adjusted), back to the highest reading in the 48-year-history of the survey last reached in March and 32 points higher than May 2021.

“Inflation continues to outpace compensation which has reduced real incomes across the nation,” said NFIB Chief Economist Bill Dunkelberg. “Small business owners remain very pessimistic about the second half of the year as supply chain disruptions, inflation, and the labor shortage are not easing.”

Other key findings include:
- Fifty-one percent of owners reported job openings that could not be filled, up four points from April.
- The net percent of owners who expect real sales to be higher decreased three points from April to a net negative 15%.
- A net 46% (seasonally adjusted) of owners reported raising compensation, down three points from April with a net 25% planning to raise compensation in the next three months, down two points from April but historically high.
- Thirty-nine percent of owners report that supply chain disruptions have had a significant impact on their business, up three points. Another 31% report a moderate impact and 22% report a mild impact. Only 8% of owners report no impact from the recent supply chain disruptions.

As reported in NFIB’s monthly jobs report, the labor markets are tight as 51% (seasonally adjusted) of all owners reported job openings they could not fill in the current period. Ninety-two percent of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill. Twelve percent of owners cited labor costs as their top business problem. Twenty-three percent said that labor quality was their top business problem, behind inflation.

Unadjusted, 3% of owners reported lower average selling prices and 71% reported higher average selling prices. Price hikes were the most frequent in wholesale (80% higher, 4% lower), manufacturing (79% higher, 1% lower), retail trades (78% higher, 2% lower), and construction (77% higher, 2% lower).

Fifty-three percent of owners reported capital outlays in the last six months, down one point from April. Of those owners making expenditures, 36% reported spending on new equipment, 21% acquired vehicles, and 15% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 12% spent money for new fixtures and furniture. Twenty-five percent of owners plan capital outlays in the next few months, down two points from April.

One percent of owners (seasonally adjusted) reported higher nominal sales in the past three months, down two points from April. The net percent of owners expecting higher real sales volumes decreased three points to a net negative 15%.

The net percent of owners reporting inventory increases fell five points to a net negative 1%. Seventeen percent of owners reported increases in stocks while 15% reported reductions as solid sales reduced inventories at many firms. A net 8% of owners viewed current inventory stocks as “too low” in May, up two points from April. A net 1% of owners plan inventory investment in the coming months.

The frequency of reports of positive profit trends was a net negative 24%, down seven points from April. Among the owners reporting lower profits, 34% blamed the rise in the cost of materials, 25% blamed weaker sales, 10% cited labor costs, 9% cited the usual seasonal change, 8% cited lower prices, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 49% credited sales volumes, 18% cited higher prices, and 16% cited usual seasonal change.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-two percent reported all credit needs met and 65% said they were not interested in a loan. A net 4% reported their last loan was harder to get than in previous attempts. One percent of owners reported that financing was their top business problem. A net 14% of owners reported paying a higher rate on their most recent loan, down two points from April.

LABOR MARKETS
As employment continues to approach the 2020 high, labor markets get tighter. Fifty-one percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 4 points from April. Forty-two percent have openings for skilled workers (up 2 points) and 25 percent have openings for unskilled labor (up 3 points). The difficulty in filling open positions is particularly acute in the construction, manufacturing, retail, and wholesale sectors. Openings are lowest in the agriculture and finance sectors. Overall, however, the current level of openings is over 20 percentage points higher than the historical average. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 26 percent planning to create new jobs in the next three months, up 6 points from April and close to a 48-year record high. Sixty-one percent (92 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 6 points). Thirty-three percent of owners reported few qualified applicants for their open positions (up 3 points) and 28 percent reported none (up 3 points, and 1 point shy of the 48-year record high).

CAPITAL SPENDING
Fifty-three percent reported capital outlays in the last six months, down 1 point from April. Surprisingly, orders for capital goods have remained strong for the whole economy, less so for small firms which dominate the services sectors. Of those making expenditures, 36 percent reported spending on new equipment (down 4 points), 21 percent acquired vehicles (down 3 points), and 15 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (down 2 points) and 12 percent spent money for new fixtures and furniture (up 1 point). Twenty-five percent plan capital outlays in the next few months, down 2 points from April. 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. In addition, Federal Reserve actions will raise interest rates, increasing the cost of financing capital projects and reducing the expected gains from investments.

INFLATION
The net percent of owners raising average selling prices increased 2 points from April to a net 72 percent seasonally adjusted (the same as March 2022 and a record high reading). Unadjusted, 3 percent (down 1 point) reported lower average selling prices and 71 percent (up 1 point) reported higher average prices. Price hikes were most frequent in wholesale (80 percent higher, 4 percent lower), manufacturing (79 percent higher, 1 percent lower), retail trades (78 percent higher, 2 percent lower), and construction (77 percent higher, 2 percent lower). Seasonally adjusted, a net 47 percent plan price hikes (up 1 point).

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-two percent reported all credit needs met (down 6 points) and 65 percent said they were not interested in a loan (up 4 points). A net 4 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). A net 14 percent of owners reported paying a higher rate on their most recent loan, down 2 points from April. The average rate paid on short maturity loans was 5.7 percent, still among the lowest rates paid in the 48-year survey history. Twenty-two percent of all owners reported borrowing on a regular basis (down 4 points).

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 46 percent reported raising compensation, down 3 points from April. A net 25 percent plan to raise compensation in the next three months, down 2 points from April but historically very high. Twelve percent cited labor costs as their top business problem, up 4 points from April, and 23 percent said that labor quality was their top business problem (unchanged). Labor quality remains in second place behind “inflation.” The frequency of reports of positive profit trends was a net negative 24 percent, down 7 points from April. Among owners reporting lower profits, 34 percent blamed the rise in the cost of materials, 25 percent blamed weaker sales, and 10 percent cited labor costs. For owners reporting higher profits, 49 percent credited sales volumes,18 percent cited higher prices, and 16 percent cited usual seasonal change.

SALES AND INVENTORIES
One percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from April. The net percent of owners expecting higher real sales volumes decreased 3 points to a net negative 15 percent. The net percent of owners reporting inventory increases fell 5 points to a net negative 1 percent. Not seasonally adjusted, 17 percent reported increases in stocks while 15 percent reported reductions. Thirty-nine percent of owners report that supply chain disruptions have had a significant impact on their business (up 3 points). Another 31 percent report a moderate impact and 22 percent report a mild impact. Only 8 percent report no impact from recent supply chain disruptions. A net 8 percent of owners viewed current inventory stocks as “too low” in May, up 2 points from April. A net 1 percent of owners plan inventory investment in the coming months, unchanged from April.

COMMENTARY
Things are pretty messy these days. Inflation out of control. Stock markets are sagging. The war in Ukraine continues. And China’s zero Covid policy remains in place. A lot of moving parts continue to disrupt the global economy. It’s a mess indeed.

Inflation is now taxing earnings at an unacceptable rate. Compensation is growing at an annual rate of about 6% but inflation is at 8%, reducing real incomes. As is always the case, the impact is not evenly spread across the population, especially harmful to those on fixed incomes and those earning less than average incomes. House prices are up 20% over the year so those interested in homeownership are being priced out of the market. Mortgage rates are rising as well. To combat inflation, the Federal Reserve will rapidly raise interest rates to slow spending. The prime rate of interest hit 20% during the last big inflation fight over 40 years ago. For this round, prime started at 3.5%. It will go higher, and borrowers will pay more for loans. But for now, borrowing is still relatively inexpensive but maybe not for long.

For the moment, the economy seems to be doing okay despite continuing supply side issues that are holding down profits, not due weak spending. But we are skating on thin ice, cracks are appearing, and the cold water is deep. We are short on life preservers. But the Administration refuses to ease up on the policies it implemented that produced higher energy costs and overheated spending. Instead, it proposes more spending, bigger government, and higher taxes, all of which will raise prices. Owners remain very pessimistic about the second half of the year. But until a recession shows its face, they will “make hay while the sun shines.”