NFIB’s Small Business Optimism Index decreased 0.8 points in March to 90.1, marking the 15th consecutive month below the 49-year average of 98. Twenty-four percent of owners reported inflation as their single most important business problem, down four points from last month. Small business owners expecting better business conditions over the next six months remain at a net negative 47%.

“Small business owners are cynical about future economic conditions,” said NFIB Chief Economist Bill Dunkelberg. “Hiring plans fell to their lowest level since May 2020, but strong consumer spending has kept Main Street alive and supported strong labor demand.”

Key findings include:

- Forty-three percent of owners reported job openings that were hard to fill, down four points from February and remaining historically very high.
- The net percent of owners raising average selling prices decreased one point to a net 37% seasonally adjusted.
- The net percent of owners who expect real sales to be higher deteriorated six points from February to a net negative 15%.

As reported in NFIB’s monthly jobs report, a seasonally adjusted net 15% of owners are planning to create new jobs in the next three months. Twenty-six percent of owners reported few qualified applicants for their open positions and 27% reported none. Eleven percent of owners cited labor costs as their top business problem and 23% said that labor quality was their top business problem. Labor quality remains in second place behind inflation by one point as the top business problem.

Fifty-seven percent of owners reported capital outlays in the next six months, down three points from February. Of those making expenditures, 40% reported spending on new equipment, 23% acquired vehicles, and 11% spent money for new fixtures and furniture. Fifteen percent improved or expanded facilities and 6% acquired new buildings or land for expansion. Twenty percent of owners are planning capital outlays in the next few months, down one point from February. Overall, the small business sector shows little strength from capital spending.

A net negative 6% of all owners (seasonally adjusted) reported higher nominal sales in the past three months. Sales are trending down. The net percent of owners expecting higher real sales volumes deteriorated six points to a net negative 15%.

The net percent of owners reporting inventory increases was unchanged at a net negative 1%. Not seasonally adjusted, thirteen percent reported increases in stocks and 17% reported reductions. Nineteen percent of owners reported that supply chain disruptions still have a significant impact on their business. Another 31% reported a moderate impact and 35% reported a mild impact.

A net 1% of owners viewed current inventory stocks as “too low” in March, up five points from February. By industry, shortages are reported most frequently in transportation (18%), retail (17%), manufacturing (16%), and wholesale (16%). Complaints of shortages in construction (3%) have been reduced because home sales have slowed due to higher interest rates. A net negative 4% of owners plan inventory investment in the coming months, up three points from February.

The net percent of owners raising average selling prices decreased one point from February to a net 37% seasonally adjusted, the lowest since April 2021. Unadjusted, 11% reported lower average selling prices and 50% reported higher average prices. Price hikes were the most frequent in wholesale (71% higher, 16% lower), retail (61% higher, 8% lower), construction (57% higher, 8% lower), and finance (56% higher, 8% lower). Seasonally adjusted, a net 26% plan price hikes, up one point.

Seasonally adjusted, a net 42% reported raising compensation, down six points from February. A net 22% plan to raise compensation in the next three months.

The frequency of positive profit trends was a net negative 18%, five points better than in February. Among owners reporting lower profits, 31% blamed weaker sales, 23% blamed the rise in the cost of materials, 13% cited the usual seasonal change, 9% cited lower prices, 8% cited labor costs, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 48% credited sales volumes, 21% cited higher prices, 18% cited usual seasonal change, and 5% cited lower labor costs.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-nine percent reported all credit needs were met and 59% said they were not interested in a loan. A net 9% reported their last loan was harder to get than in previous attempts, up four points.

Three percent reported that financing was their top business problem. A net 26% of owners reported paying a higher rate on their most recent loan, up two points. Rates are rising, but credit is still available.

The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the fourth 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 March 2023.

LABOR MARKETS

Forty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 4 points from February. Thirty-four percent have openings for skilled workers (down 4 points) and 19 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction, transportation, and wholesale sectors. Openings are lowest in the finance sector. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 15 percent planning to create new jobs in the next three months, down 2 points from February and 17 points below its record high reading of 32 reached in August 2021. Overall, 59 percent reported hiring or trying to hire in March, down 1 point from February. Fifty-three 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 (down 1 point). Twenty-six percent of owners reported few qualified applicants for their open positions (down 4 points) and 27 percent reported none (up 3 points).

CAPITAL SPENDING

Fifty-seven percent reported capital outlays in the last six months, down 3 points from February. Of those making expenditures, 40 percent reported spending on new equipment (unchanged), 23 percent acquired vehicles (down 3 points), and 11 percent spent money for new fixtures and furniture (down 1 point). Fifteen percent improved or expanded facilities (down 3 points) and 6 percent acquired new buildings or land for expansion (unchanged). Twenty percent plan capital outlays in the next few months, down 1 point from February and historically very weak.

INFLATION

The net percent of owners raising average selling prices decreased 1 point from February to a net 37 percent seasonally adjusted, the lowest since April 2021. Unadjusted, 11 percent (down 1 point) reported lower average selling prices and 50 percent (unchanged) reported higher average prices. Price hikes were most frequent in wholesale (71 percent higher, 16 percent lower), retail (61 percent higher, 8 percent lower), construction (57 percent higher, 8 percent lower), and finance (56 percent higher, 8 percent lower). Seasonally adjusted, a net 26 percent plan price hikes (up 1 point).

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-nine percent reported all credit needs met (up 4 points) and 59 percent said they were not interested in a loan (down 3 points). A net 9 percent reported their last loan was harder to get than in previous attempts (up 4 points). Three percent reported that financing was their top business problem (up 1 point). A net 26 percent of owners reported paying a higher rate on their most recent loan, up 2 points from February. The average rate paid on short maturity loans was 7.8 percent, 0.1 percentage points below February’s highest level (also in November) since March 2008. Thirty percent of all owners reported borrowing on a regular basis (unchanged).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 42 percent reported raising compensation, down 6 points from February. A net 22 percent plan to raise compensation in the next three months, down 1 point from February. Eleven percent cited labor costs as their top business problem, down 1 point from February. Twenty-three percent said that labor quality was their top business problem (up 2 points). Labor quality remains in second place behind “inflation” by 1 point as the top business problem. The frequency of reports of positive profit trends was a net negative 18 percent, 5 points better than February. Among owners reporting lower profits, 31 percent blamed weaker sales, 23 percent blamed the rise in the cost of materials, 13 percent cited the usual seasonal change, 9 percent cited lower prices, 8 percent cited labor costs, 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, unchanged from February. The net percent of owners expecting higher real sales volumes deteriorated 6 points to a net negative 15 percent. The net percent of owners reporting inventory increases was unchanged at a net negative 1 percent. Not seasonally adjusted, 13 percent reported increases in stocks (unchanged) and 17 percent reported reductions (down 2 points). Nineteen percent of owners recently reported that supply chain disruptions still have a significant impact on their business (down 1 point). A net 1 percent of owners viewed current inventory stocks as “too low” in March, up 5 points from February. By industry, shortages are reported most frequently in transportation (18 percent), retail (17 percent), manufacturing (16 percent), and wholesale (16 percent). A net negative 4 percent of owners plan inventory investment in the coming months, up 3 points from February.

COMMENTARY

While prospects for the economy continue to dim, the widely expected recession has not yet appeared. Fourth quarter growth was shaded down to 2.6%, inventory accumulation accounted for 60% of the total growth. Weakness in residential construction took 1.2 percentage points off of the growth rate and will continue to be a negative in the first quarter numbers. Hiring plans fell to their lowest level since May 2020.

There are major uncertainties ahead, most immediate is concern that a banking crisis could develop. This usually results from too many risky loans going bad, including auto and consumer credit. However, the current issue resulted from poor risk management. The Fed kept rates too low for too long, encouraging the growth of risky assets. Lots of investments looked good with a 2% cost of funds and bank savings paid virtually nothing.

The Fed’s concern was deflation. Then Covid and a tidal wave of money from the government hit the economy. These funds were deposited in bank accounts. Banks could not get it productively loaned out, so they put the money into long-term Treasury bonds (short term yields were low). The spending plus supply problems produced inflation and triggered the 475 basis point Fed rate hike. Concern about an economic slowdown and the safety of uninsured deposits triggered a run on deposits at a few banks who were forced to liquidate their Treasury bonds. Silicon Valley Bank took a huge loss liquidating their long term Treasury bonds as new bonds had interest rates double what the existing bonds promised which were sold only at a lower price. New regulators appear to have put an end to the run on deposits for now by extending insurance on all deposits, but there is concern that other financial problems might develop. The $250,000 limit was set in 2008, but inflation has increased 40% since then, reducing the real value of the insurance protection.

Then there is the debt ceiling debate. Democrats want the ceiling raised so they can borrow more money for their spending agenda. Republicans want spending reductions and re-establishment of a budget process, rather than continuing resolutions that just roll over current spending authorizations. Tax revenues are more than adequate to pay interest on the debt and expiring debt can be rolled over into new debt without violating the ceiling. But interest on the debt is increasing as the Fed raises rates and must be paid to avoid a default. Thus, other spending (like $80 billion for the IRS) might have to be scrapped. These negotiations always go to the last minute as they often do.

All of this weighs heavily on small business owners, almost all of whom now see deteriorating business conditions and poor prospects for sales. Optimism has been at recession levels for a year. But unexpectedly strong consumer spending has kept Main Street alive and supported strong labor demand.