The NFIB Small Business Optimism Index decreased in July to 99.7, a decrease of 2.8 points, reversing June’s 2.9-point gain. Six of the 10 components declined, three improved, and one was unchanged. The NFIB Uncertainty Index decreased seven points to 76, indicating owners’ views are held with more certainty than in earlier months.

“Small business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” said NFIB Chief Economist Bill Dunkelberg. “As owners look for qualified workers, they are also reporting that supply chain disruptions are having an impact on their businesses. Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains.”

Other key findings include:

- Sales expectations over the next three months decreased 11 points to a net negative 4% of owners.
- Owners expecting better business conditions over the next six months decreased eight points to a net negative 20%.
- Earnings trends over the past three months decreased eight points to a net negative 13%.

As reported in NFIB’s monthly jobs report, 49% of owners reported job openings that could not be filled, a 48-year record high. Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 27% planning to create new jobs in the next three months, down one point from June’s record high reading.

Fifty-five percent of owners reported capital outlays in the last six months, up two points from June but historically a below average reading. Of those making expenditures, 39% reported spending on new equipment, 23% acquired vehicles, and 14% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 11% spent money for new fixtures and furniture. Twenty-six percent of owners are planning capital outlays in the next few months. At some point, owners will have to step up capital spending to acquire and improve the quality of capital available to support new hires.

A net 5% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down four points from June. The net percent of owners expecting higher real sales volumes declined 11 points to a net negative 4%, a stubbornly negative view but based on their realities.

The percent of owners reporting inventory increases declined seven points to a net negative 6%. A net 12% of owners view current inventory stocks as “too low” in July, up one point from June and a 48-year record high reading. A net 6% of owners plan inventory investment in the coming months, down five points from June and also a historically high reading.

A net 46% of owners (seasonally adjusted) reported raising average selling prices. Unadjusted, 5% reported lower average selling prices and 52% reported higher average prices. Price hikes were the most frequent in wholesale (73% higher, 0% lower), manufacturing (61% higher, 6% lower), and retail (57% higher, 7% lower). Seasonally adjusted, a net 44% plan price hikes. This is inflation, the question is for how long?

In July, 52% of owners reported raising average selling prices, two points higher than June. Price increases in wholesale and retail trades posted significant declines. The largest increases in price-raising activity were in the non-professional services and transportation.

A net 38% of owners (seasonally adjusted) reported raising compensation, down one point from June’s record high of 39%. A net 27% plan to raise compensation in the next three months, up one point from June and a 48-year record high reading.

The frequency of reports of positive profit trends declined eight points to a net negative 13%. Among those small employers reporting lower profits, 32% blamed weaker sales, 31% cited a rise in the cost of materials, 10% cited labor costs, 7% cited lower prices, 6% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 62% credited sales volumes, 20% cited usual seasonal change, and 7% cited higher prices.

Down from June, only 2% of owners reported that all their borrowing needs were not satisfied. Twenty-three percent reported all credit needs were met and 61% said they were not interested in a loan. A net 2% reported their last loan was harder to get than in previous attempts. One percent of owners reported that financing was their top business problem. Many small firms are still operating with PPP funds.

LABOR MARKETS
Small businesses continue to struggle to find workers to fill open positions. Forty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 3 points from June and a record high reading. Unfilled job openings have remained far above the 48-year historical average of 22 percent. Fortythree percent have openings for skilled workers (up 3 points) and 25 percent have openings for unskilled labor (up 3 points). Fifty-nine percent of the job openings in construction are for skilled workers, down 1 point. Overall, 61 percent reported hiring or trying to hire in July, down 2 points from June. The issue will be whether the supply of labor will cooperate. Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 27 percent planning to create new jobs in the next three months, down 1 point from June’s record high reading. Finding qualified employees remains a problem. Fifty-seven percent (93 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in July (up 1 point). Where there are open positions, labor quality remains a significant problem. Thirty-one percent of owners reported few qualified applicants for their open positions (down 1 point) and 26 percent reported none (up 2 points), a 48-year record high.

CAPITAL SPENDING
Fifty-five percent reported capital outlays in the last six months, up 2 points from June but historically not strong. Capital spending is critical to the growth of the economy and increased output and income. Of those making expenditures, 39 percent reported spending on new equipment (up 3 points), 23 percent acquired vehicles (unchanged), and 14 percent improved or expanded facilities (down 2 points). Six percent acquired new buildings or land for expansion (unchanged) and 11 percent spent money for new fixtures and furniture (unchanged). Twenty-six percent plan capital outlays in the next few months, up 1 point from June. Capital investment (equipment, technology etc.) is the key to improvements in worker productivity, and consequently, worker compensation. But owners have a very dim view of prospects for business conditions and sales growth needed to support the demand for new equipment and expanded capacity.

COMPENSATION AND EARNINGS
Seasonally adjusted, a net 38 percent reported raising compensation, down 1 point from June’s record high of 39 percent. A net 27 percent plan to raise compensation in the next three months, up 1 point from June and a 48-year record high reading. Nine percent cited labor costs as their top business problem (up 1 point) and 26 percent said that labor quality was their top business problem, unchanged from June but remaining the top overall concern. The frequency of reports of positive profit trends declined 8 points to a net negative 13 percent, driven primarily by the increase in sales. Among owners reporting lower profits, 32 percent blamed weaker sales, 31 percent cited a rise in the cost of materials, 10 percent cited labor costs, 7 percent cited lower prices,6 percent cited the usual seasonal change, and 3 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 62 percent credited sales volumes, 20 percent cited usual seasonal change, and 7 percent cited higher prices.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-three percent reported all credit needs met (down 2 points) and 61 percent said they were not interested in a loan (up 2 points). A net 2 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). The net percent of owners reporting paying a higher rate on their most recent loan was 1 percent, unchanged from June. The average rate paid on short maturity loans was 4.9 percent, unchanged from June. Twenty-one percent of all owners reported borrowing on a regular basis (unchanged).

SALES AND INVENTORIES
A net 5 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 4 points from June. The net percent of owners expecting higher real sales volumes declined 11 points to a net negative 4 percent. It appears that owners are losing confidence in the strength of the economy. The net percent of owners reporting inventory increases declined 7 points to a net negative 6 percent. This is due primarily to the very strong levels of sales and the inability of owners to replenish inventories through their supply chains. A net 12 percent of owners view current inventory stocks as “too low” in July, up 1 point from June and historically a record high. However, replenishing the inventories sold is not easy. Over 30% of small businesses reported that supply chain disruptions have had a significant impact on their business(es). A net 6 percent of owners plan inventory investment in the coming months, down 5 points from June, a historically high reading.

INFLATION
The net percent of owners raising average selling prices down 1 point to a net 46 percent, seasonally adjusted. Unadjusted, 5 percent (unchanged) reported lower average selling prices and 52 percent (down 2 points) reported higher average prices. Seasonally adjusted, a net 44 percent plan price hikes (unchanged). In July, 52% reported raising average selling prices, 2 points higher than in June. Of those who raised compensation (41%), 62% raised average selling prices. Among those who raised compensation “a lot” (5%), 13% raised prices by 10% or more. That is a considerable amount of price pressure.


COMMENTARY
Real growth in the economy remains solid, over 6% in real terms in Q2, a historically high reading. The level of GDP has now exceeded the 2019 peal, although employment has not. Fewer workers are making more stuff. To a large extent this is because we switched much of our spending from services (a labor-intensive industry sector) to goods production during the Pandemic. Employment will “re-balance” as consumers adjust their spending, but now dependent on the ability for the service sector to staff up to meet increased demand. Hiring in the restaurant etc. sector continues to lead the job creation parade, but remains a frustrating task for owners who are unable to fill open positions. The virus continues to create uncertainty about its impact on people and the response of government regulators.

The government stimulus that powered spending in the first half of the year will start to fade, slowing GDP growth. Consumers banked a lot of that money, especially higher income earners, driving savings deposits to $2 trillion higher than pre-Pandemic levels. Inventories are especially low and replenishment will contribute to economic growth as soon as supply chain disruptions get untangled. Economic disruptions related to Covid will likely continue to into 2022 for many. Overall, the second half will be OK, what we take into 2022 remains to be seen.