The National Federation of Independent Business (NFIB) reported a decline in small business optimism in August, as rising inflation and labor shortages dampened the outlook of entrepreneurs. The NFIB Small Business Optimism Index, a quarterly survey of U.S. small businesses, fell 0.6 points to 91.3, the lowest level since March 2021. The index has been below its historical average of 98 for 20 consecutive months.
Inflation Concerns Top the List of Problems
According to the NFIB, one of the main factors that drove down optimism in August was the increasing cost of goods and services. The number of small business owners who cited inflation as their top problem rose two points to 23%, the highest level since 1981. The NFIB also noted that 47% of owners reported raising their average selling prices in the past three months, up four points from July and the highest reading since 1981.
The NFIB said that inflation is eroding the profits and purchasing power of small businesses, as well as hurting consumer confidence and spending. The NFIB urged the Federal Reserve to take action to curb inflation and prevent further damage to the economy.
Labor Shortages Persist Despite Higher Wages
Another major challenge that small businesses faced in August was finding qualified workers to fill open positions. The NFIB said that 40% of owners reported having job openings that could not be filled, a record high for the survey. The NFIB also said that 27% of owners reported finding qualified workers as their top problem, also a record high.
To attract and retain workers, many small businesses have been offering higher wages and benefits. The NFIB said that 41% of owners reported raising compensation in August, up three points from July and the highest level since February 2020. However, the NFIB also said that higher wages are adding to the cost pressures and inflation worries of small businesses.
Sales Expectations and Business Conditions Turn Negative
The NFIB also reported a significant decline in sales expectations and business conditions for the next six months. The net percent of owners expecting higher real sales volumes fell seven points to a negative 5%, indicating more owners expect lower sales than higher sales. The net percent of owners expecting better business conditions in the next six months fell four points to a negative 28%, indicating more owners expect worse conditions than better conditions.
The NFIB said that these indicators reflect the uncertainty and pessimism that small businesses have about the future of the economy amid the ongoing COVID-19 pandemic and its variants, as well as the potential impact of new government policies and regulations.
Capital Spending Remains Steady but Inventory Levels Fall
Despite the drop in optimism, some indicators showed that small businesses were still investing in their operations and growth. The NFIB said that 59% of owners reported making capital outlays in August, up two points from July and above the historical average of 56%. The most common types of capital spending were equipment (42%) and vehicles (24%).
However, the NFIB also said that inventory levels fell in August, as supply chain disruptions and high demand made it difficult for small businesses to replenish their stocks. The net percent of owners reporting higher inventories fell four points to a negative 9%, indicating more owners had lower inventories than higher inventories. The net percent of owners planning to increase inventory levels fell one point to a negative 3%, indicating more owners plan to reduce inventories than increase them.
The NFIB Small Business Optimism Index showed that small business confidence declined in August, as inflation concerns and labor shortages weighed on the outlook of entrepreneurs. The index also showed a negative trend in sales expectations and business conditions for the next six months, reflecting the uncertainty and pessimism that small businesses have about the future of the economy. However, some indicators showed that small businesses were still investing in capital spending, although inventory levels fell due to supply chain issues and high demand.
