The NFIB Small Business Optimism Index increased in August to 100.1, up 0.4 points from July. Five of the 10 Index components improved, four declined, and one was unchanged. The NFIB Uncertainty Index decreased seven points to 69, the lowest level since January 2016.

“As the economy moves into the fourth quarter, small business owners are losing confidence in the strength of future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions.”

Key findings include:
- Owners expecting better business conditions over the next six months decreased by eight points to a net negative 28%. This indicator has declined 16 points over the past two months to its lowest reading since January 2013.
- Fifty percent of owners reported job openings that could not be filled, an increase of one point from July and a 48-year record high for the second consecutive month.

As reported in NFIB’s monthly jobs report, 50% of owners reported job openings they could not fill in the current period, up one point from July and a record high reading for the second consecutive month. The number of unfilled job openings remains far above the 48-year historical average of 22%.

Fifty-five percent of owners reported capital outlays in the last six months, unchanged from July and historically weak. Of those businesses making expenditures, 41% reported spending on new equipment, 22% acquired vehicles, and 16% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 12% spent money for new fixtures and furniture.

Thirty percent of owners plan capital outlays in the next few months, up four points from July but still historically fairly weak.

A net zero percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down five points from July. The net percent of owners expecting higher real sales volumes improved two points to a net negative 2%.

The net percent of owners reporting inventory increases rose four points to a net negative 2%. Over 37% of owners report supply chain disruptions have had a significant impact on their business, 29% report a moderate impact, and 21% report a mild impact. Only 13% report no impact from recent supply chain disruptions.

A net 11% of owners view current inventory stocks as “too low” in August, down one point from July’s record high. A net 11% of owners plan inventory investment in the coming months, up five points from July.

The net percent of owners raising average selling prices increased three points to a net 49% (seasonally adjusted). Unadjusted, 4% reported lower average selling prices and 52% reported higher average prices. Price hikes were the most frequent in wholesale (68% higher, 0% lower), manufacturing (60% higher, 2% lower), and retail (52% higher, 4% lower). Seasonally adjusted, a net 44% of owners plan price hikes.

A net 41% (seasonally adjusted) reported raising compensation, up three points from July and a 48-year record high reading. A net 26% plan to raise compensation in the next three months, down one point from July’s record high reading. Ten percent of owners cited labor costs as their top business problem and 28% said that labor quality was their top business problem, up two points from July and both are record high readings.

The frequency of reports of positive profit trends declined two points to a net negative 15%. Among owners reporting lower profit trends, 34% blamed the rise in the cost of materials, 27% blamed weaker sales, 9% 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, 60% credited sales volumes, 20% cited usual seasonal change, and 10% cited higher prices.

Two percent of owners reported that all their borrowing needs were not satisfied, 22% reported all credit needs were met, and 63% said they were not interested in a loan. A net 3% reported their last loan was harder to get than in previous attempts. Only 1% of owners reported that financing was their top business problem. A net 2% of owners reported paying a higher rate on their most recent loan, up one point from July.

The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in August 2021.

LABOR MARKETS
Small businesses continue to struggle to find workers to fill open positions. Fifty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from July and a record high reading for the second consecutive month. The number of unfilled job openings remains far above the 48-year historical average of 22 percent. Forty-four percent have openings for skilled workers (up 1 point) and 27 percent have openings for unskilled labor (up 2 points). Sixty-six percent of the job openings in construction are for skilled workers, up 7 points. Sixty-seven percent of construction firms reported few or no qualified applicants (up 1 point). Overall, 66 percent reported hiring or trying to hire in August, up 5 points from July. Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 32 percent planning to create new jobs in the next three months, up 5 points and a 48-year record high reading. Finding qualified employees remains a problem. Sixty percent (91 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 3 points). Where there are open positions, labor quality remains a significant problem. Thirty-one percent of owners reported few qualified applicants for their open positions (unchanged) and 29 percent reported none (up 3 points), a 48-year record high.

CAPITAL SPENDING
Fifty-five percent reported capital outlays in the last six months, unchanged from July, historically weak. A recovery in investment will be needed to spark an improvement in productivity, unlikely to occur while owners remain pessimistic about future business conditions. Of those making expenditures, 41 percent reported spending on new equipment (up 2 points), 22 percent acquired vehicles (down 1 point), and 16 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (unchanged) and 12 percent spent money for new fixtures and furniture (up 1 point). Thirty percent plan capital outlays in the next few months, up 4 points from July but, historically still fairly weak, even if one of the better readings since 2007. After the long period of depressed spending starting in 2008, more is needed to boost the economy and productivity on Main Street.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 41 percent reported raising compensation, up 3 points from July and a 48-year record high reading. A net 26 percent plan to raise compensation in the next three months, down 1 point from July’s record high reading. Ten percent cited labor costs as their top business problem (up 1 point) and 28 percent said that labor quality was their top business problem, up 2 points from July and record high readings. The frequency of reports of positive profit trends declined 2 points to a net negative 15 percent. Among owners reporting lower profits, 34 percent blamed the rise in the cost of materials, 27 percent blamed weaker sales, 9 percent cited labor costs, 9 percent cited the usual seasonal change, 8 percent cited lower prices, and 3 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 60 percent credited sales volumes, 20 percent cited usual seasonal change, and 10 percent cited higher prices.

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 1 point) and 63 percent said they were not interested in a loan (up 2 points). A net 3 percent reported their last loan was harder to get than in previous attempts (up 1 point). One percent reported that financing was their top business problem (unchanged). A net 2 percent of owners reporting paying a higher rate on their most recent loan, up 1 point from July. The average rate paid on short maturity loans was 4.6 percent, down 0.3 points from July. Twenty percent of all owners reported borrowing on a regular basis (down 1 point).

SALES AND INVENTORIES
A net zero percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 5 points from July. The net percent of owners expecting higher real sales volumes improved by 2 points to a net negative 2 percent, a rather disappointing forecast. The net percent of owners reporting inventory increases improved 4 points to a net negative 2 percent, still more owners reporting declines than gains. Over 37 percent of owners report supply chain disruptions have had a significant impact on their business. Another 29 percent report a moderate impact and 21 percent report a mild impact. Only 13 percent report no impact from recent supply chain disruptions. A net 11 percent of owners view current inventory stocks as “too low” in August, down 1 point from July’s record high. A net 11 percent of owners plan inventory investment in the coming months, up 5 points from July, a response to the high percent of owners that reported current stocks as “too low.”

INFLATION
The net percent of owners raising average selling prices increased 3 points to a net 49 percent seasonally adjusted. Unadjusted, 4 percent (down 1 point) reported lower average selling prices and 52 percent (unchanged) reported higher average prices. Price hikes were most frequent in wholesale (68 percent higher, 0 percent lower), manufacturing (60 percent higher, 2 percent lower), and retail (52 percent higher, 4 percent lower). Seasonally adjusted, a net 44 percent plan price hikes (unchanged).

COMMENTARY
As the economy moves into the fourth quarter, the big question mark is LABOR, its availability, its cost, and the impact on inflation. Job creation has been volatile (but positive so far), ranging from 200,000 to 1 million jobs created per month. Total employment is still 5 million below its pre-Covid peak and the unemployment rate is 5.2%, well above the 3.5% pre-Pandemic low. So, just a year and a half ago, we had a very tight labor market with very high employment across demographics. A major driver has been recovery in leisure and hospitality jobs, an industry that involve a lot of personal contact, hit hard by pandemic policies However, August produced 0 new jobs there, maybe because hiring for the summer season was about over.

For Main Street businesses, the clear problem now is finding enough labor to staff up to meet demand. Consumer spending has been very strong as the economy opened up and could carry the economy into Q4. Savings are plentiful to support spending, although millions of consumers receiving supplemental unemployment payments will lose those benefits this month.

Then there’s inflation. Not a problem as long as firms can pass rising input costs (including wages) on to customers in higher selling prices. But if consumers become price-shy, then profits will be squeezed and firms will have to adjust costs quickly, including labor costs. With no government income supports, consumer spending will slow, making the fourth quarter the slowest growth quarter in 2021.

And then there is the political uncertainty. Higher taxes and more regulations, in some cases by all levels of government. There is much to worry about for small business owners. Top all that off with Covid, and we get a very challenging year.