The NFIB Small Business Optimism Index decreased in February to 89.4, marking the 26th consecutive month below the 50-year average of 98. Twenty-three percent of small business owners reported that inflation was their single most important business problem in operating their business, up three points from last month and replacing labor quality as the top problem.

“While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,” said NFIB Chief Economist Bill Dunkelberg. “The labor market has also eased slightly as small business owners are having an easier time attracting and retaining employees.”

Key findings include:

Reports of labor quality as the single most important problem for business owners decreased five points to 16%, the lowest reading since April 2020.
The net percent of owners who expect real sales to be higher increased six points from January to a net negative 10% (seasonally adjusted), an improvement from last month.
Small business owners’ plans to fill open positions continue to slow, with a seasonally adjusted net 12% planning to create new jobs in the next three months, the lowest level since May 2020.
Thirty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down two points from January and the lowest reading since January 2021.
The net percent of owners raising average selling prices declined one point from January to a net 21% (seasonally adjusted), the lowest reading since January 2021.

As reported in NFIB’s monthly jobs report, 56% of owners reported hiring or trying to hire in February. Twenty-five percent of owners reported few qualified applicants for their open positions and 26% reported none.

Fifty-four percent of owners reported capital outlays in the last six months, down five points from January. Of those making expenditures, 35% reported spending on new equipment, 23% acquired vehicles, and 15% improved or expanded facilities. Twelve percent spent money on new fixtures and furniture and 6% acquired new buildings or land for expansion. Twenty-one percent (seasonally adjusted) plan capital outlays in the next few months.

A net negative 13% of all owners (seasonally adjusted) reported higher nominal sales in the past three months. The net percent of owners expecting higher real sales volumes improved six points to a net negative 10% (seasonally adjusted).

The net percent of owners reporting inventory gains decreased one point to a net negative 1% (seasonally adjusted). Thirteen percent reported increases in stocks and 19% reported reductions. A net negative 4% (seasonally adjusted) of owners viewed current inventory stocks as “too low” in February.

By industry, shortages are reported the most frequent in the transportation (17%), services (12%), construction (11%), and manufacturing (11%) sectors. Shortages were reported least frequently in the wholesale (0%) and agriculture (5%) sectors. A net negative 7% (seasonally adjusted) of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices declined one point from January to a net 21% (seasonally adjusted), the lowest reading since January 2021. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, replacing labor quality as the top problem.

Unadjusted, 16% reported lower average selling prices and 37% reported higher average prices. Price hikes were the most frequent in the finance (59% higher, 2% lower), retail (43% higher, 13% lower), construction (42% higher, 8% lower), services (36% higher, 8% lower), and professional services (36% higher, 0% lower) sectors. Seasonally adjusted, a net 30% plan price hikes.

Seasonally adjusted, a net 35% reported raising compensation, down four points from January and the lowest reading since May 2021. A seasonally adjusted 19% plan to raise compensation in the next three months, down seven points from January and the lowest since March 2021.

Eleven percent cited labor costs as their top business problem, up one point from January and only two points below the highest reading of 13% reached in December 2021. Sixteen percent said that labor quality was their top business problem, the lowest reading since April 2020.

The frequency of reports of positive profit trends was a net negative 31% (seasonally adjusted), a very poor reading. Among those owners reporting lower profits, 29% blamed weaker sales, 15% blamed the rise in the cost of materials, 13% cited usual seasonal change, and 11% cited price change. For owners reporting higher profits, 42% credited sales volumes, 29% cited usual seasonal change, and 14% cited higher selling prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-four percent reported all credit needs met and 61% said they were not interested in a loan. A net 7% reported their last loan was harder to get than in previous attempts.

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 February 2024.

LABOR MARKETS

Thirty-seven percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from January and the lowest reading since January 2021. Thirty-two percent have openings for skilled workers (up 2 points) and 12 percent have openings for unskilled labor (down 3 points). The difficulty in filling open positions is particularly acute in the construction, transportation, and wholesale sectors. Job openings in construction were up 6 points from last month and over half have a job opening they can’t fill. Owners’ plans to fill open positions continue to slow, with a seasonally adjusted net 12 percent planning to create new jobs in the next three months, down 2 points from January and the lowest level since May 2020. Overall, 56 percent reported hiring or trying to hire in February, up 1 point from January. Fifty-one 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 2 points). Twenty-five percent of owners reported few qualified applicants for their open positions (down 1 point) and 26 percent reported none (up 3 points). Reports of labor quality as the single most important problem for business owners decreased 5 points to 16 percent, the lowest reading since April 2020. Labor cost reported as the single most important problem for business owners increased 1 point to 11 percent.

CAPITAL SPENDING

Fifty-four percent reported capital outlays in the last six months, down 5 points from January. A recovery in investment is needed to support an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions and lending standards tighten with high interest rates. Long term, the worker shortage has given firms an incentive to invest in labor saving technology. But, overall, capital spending is not strong historically. Of those making expenditures, 35 percent reported spending on new equipment (down 5 points), 23 percent acquired vehicles (down 2 points), and 15 percent improved or expanded facilities (down 2 points). Twelve percent spent money on new fixtures and furniture (unchanged) and 6 percent acquired new buildings or land for expansion (down 1 point). Twenty-one percent (seasonally adjusted) plan capital outlays in the next few months, down 2 points from January. A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owners’ views about the future are not supportive and financing costs are very high. Investment is needed to address labor supply chain problems which still persist in the current environment.

INFLATION

The net percent of owners raising average selling prices declined 1 point from January to a net 21 percent seasonally adjusted, the lowest reading since January 2021. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, up 3 points from last month. Unadjusted, 16 percent (up 1 point) reported lower average selling prices and 37 percent (up 1 point) reported higher average prices. Price hikes were most frequent in the finance (59 percent higher, 2 percent lower), retail (43 percent higher, 13 percent lower), construction (42 percent higher, 8 percent lower), services (36 percent higher, 8 percent lower), and professional services (36 percent higher, 0 percent lower) sectors. Seasonally adjusted, a net 30 percent plan price hikes (down 3 points).

CREDIT MARKETS

Three percent of owners reported that all their borrowing needs were not satisfied, unchanged for the third consecutive month. Twenty-four percent reported all credit needs met (down 2 points) and 61 percent said they were not interested in a loan (down 1 point). A net 7 percent reported their last loan was harder to get than in previous attempts (up 1 point). Four percent reported that financing was their top business problem (down 1 point). A net 16 percent of owners reported paying a higher rate on their most recent loan, down 2 points from January. A net 7 percent of small business owners reported loans were harder to get compared to the last three months. The average rate paid on short maturity loans was 8.7 percent. Twenty-five percent of all owners reported borrowing on a regular basis, down 4 points from last month and the lowest since June 2022.

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 35 percent reported raising compensation, down 4 points from January and the lowest reading since May 2021. A seasonally adjusted net 19 percent plan to raise compensation in the next three months, down 7 points from January and the lowest since March 2021. Eleven percent cited labor costs as their top business problem, up 1 point from January and only 2 points below the highest reading of 13 percent reached in December 2021. Sixteen percent said that labor quality was their top business problem (down 5 points). This was the lowest reading since April 2020. The frequency of reports of positive profit trends was a net negative 31 percent (seasonally adjusted), 1 point worse than January.

SALES AND INVENTORIES

A net negative 13 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from January. The net percent of owners expecting higher real sales volumes improved 6 points to a net negative 10 percent (seasonally adjusted). The net percent of owners reporting inventory gains decreased 1 point to a net negative 1 percent. Not seasonally adjusted, 13 percent reported increases in stocks (unchanged) and 19 percent reported reductions (unchanged). A net negative 4 percent (seasonally adjusted) of owners viewed current inventory stocks as “too low” (e.g. inventories are too large) in February, unchanged from January. By industry, shortages are reported most frequently in the transportation (17 percent), services (12 percent), construction (11%), and manufacturing (11 percent) sectors. A net negative 7 percent (seasonally adjusted) of owners plan inventory investment in the coming months.

COMMENTARY

Although the economy has not tanked, the edges are starting to fray. Government statistics are more volatile and don’t square with many independent measures of economic activity. Inflation is sticky. Goods prices have fallen as expected, but service prices are resisting a decline (two-thirds of consumer spending). And, for most small businesses, wage costs are the top operating expense for these labor-intensive firms. Although labor costs have never been ranked at the top as the Most Important Business Problem, it has risen to its highest levels in 50 years (at 12% in Feb. 2023).Thirty-eight percent reported raising compensation in February, a bit below the average for last year (40%), but “inflationary,” well above the historical average of 25%.

Adding to the wage stickiness is an increase in various minimum wages, making fighting inflation harder. Labor costs will be passed on to customers through higher prices (or reductions in other services). For example, a company with 20 employees that work 2,000 hours a year in California, which has a $16/hour minimum, will have to cover a cost increase of $160,000 to comply with the proposed $20/hour minimum. One candidate for the open Senate seat in California is pushing for a $50/hour federal minimum. When governments set prices (and not markets), the outcome is never good.

Small business owners have been pessimistic about the economy for years. The NFIB Index of Small Business Optimism has remained below its 50-year average (98) since August 2021 and below 92 since June of 2022. Their outlook for near-term business conditions is at 50-year low levels. In February, 39% expected “worse” conditions in six months, only 7% expected “better.” And these numbers are better than in June 2022 when 68% expected worse business conditions and only 5% expected better (record low). Consumers are also not especially optimistic and they are the important customers of most small firms. Nearly half (45% in February) of consumers in the Univ. of Michigan monthly poll characterize government policies as “poor,” 23% “good.” By political affiliation, 35% “good” for Democrats, -74% for Republicans. The Michigan Optimism Index at 77 is the best reading since mid-2021, but historically relatively weak.

Government debt continues to pile up as Congress debates billions in more spending. The interest rate on government bonds to finance spending deficits is determined by financial markets as the government offers the bonds to the public which bids on them, reflecting what private investors are willing to pay (e.g. interest rate). A ten-year bond now pays over 4% interest, more than double the rate in 2020. Small business owners have seen the average rate on their loans rise from 4% to nearly 9% (8.7% in February, down slightly) though the percent reporting that they didn’t get all the credit they wanted remained historically low.

It appears we are headed toward a re-play of the Biden-Trump election. There are many “balls in the air” being juggled by the Administration and Congress and candidates, plenty of opportunities for “oops, dropped that one.” Of top concern to small business owners will be policies related to taxes, regulations (including climate), domestic issues, and spending. Until November, there will be a lot of turmoil. In the meantime, owners are likely to remain pessimistic about future prospects.