NFIB’s Small Business Optimism Index increased 1.6 points in June to 91.0, however, it is the 18th consecutive month below the 49-year average of 98. Inflation and labor quality are tied as the top small business concerns with 24% of owners reporting each as their single most important problem. The net percent of owners raising average selling prices decreased three points to a net 29% seasonally adjusted, still a very inflationary level but trending down. This is the lowest reading since March 2021.

“Halfway through the year, small business owners remain very pessimistic about future business conditions and their sales prospects,” said NFIB Chief Economist Bill Dunkelberg. “Inflation and labor shortages continue to be great challenges for small businesses. Owners are still raising selling prices at an inflationary level to try to pass on higher inventory, labor, and energy costs.”

Key findings include:

- Small business owners expecting better business conditions over the next six months improved 10 points from May to a net negative 40%, 21 percentage points better than last June’s reading of a net negative 61%.
- Forty-two percent of owners reported job openings that were hard to fill, down two points from May but remaining historically very high.
- The net percent of owners who expect real sales to be higher improved seven points from May to a net negative 14%.

As reported in NFIB’s monthly jobs report, 59% of owners reported hiring or trying to hire in June, down four points from May. Of those hiring or trying to hire, 92% reported few or no qualified applicants for the positions they were trying to fill.

Fifty-three percent of owners reported capital outlays in the last six months, down four points from May. Of those making expenditures, 37% reported spending on new equipment, 21% acquired vehicles, and 14% improved or expanded facilities. Eight percent spent money on new fixtures and furniture and 6% acquired new buildings or land for expansion. Twenty-five percent of owners plan capital outlays in the next few months. Overall, business investment is weak.

A net negative 10% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down two points from May. The net percent of owners expecting higher real sales volumes improved seven points to a net negative 14%. A very negative outlook for the second half.

The net percent of owners reporting inventory increases decreased one point to a net negative 3%. Not seasonally adjusted, 14% reported increases in stocks and 13% reported reductions. Fourteen percent of owners recently reported that supply chain disruptions still have a significant impact on their business. Another 28% reported a moderate impact and 42% reported a mild impact. A net negative 4% of owners viewed current inventory stocks as “too low” in June, down one point from May. A net negative 3% of owners plan inventory investment in the coming months, a weak number.

The net percent of owners raising average selling prices decreased three points from May to a net 29% seasonally adjusted, the lowest since March 2021. Unadjusted, 12% of owners reported lower average selling prices and 43% reported higher average prices. Price hikes were the most frequent in retail (52% higher, 10% lower), construction (49% higher, 4% lower), finance (48% higher, 3% lower), and wholesale (47% higher, 19% lower). Seasonally adjusted, a net 31% of owners plan price hikes.

Seasonally adjusted, a net 36% of owners reported raising compensation, down five points from May. A net 22% plan to raise compensation in the next three months. Eight percent cited labor costs as their top business problem, down two points from May and 24% said that labor quality was their top business problem.

The frequency of positive profit trends was a negative net 24%, up two points from May. Among owners reporting lower profits, 28% blamed weaker sales, 24% blamed the rise in the cost of materials, 13% cited the usual seasonal change, 10% cited labor costs, 8% cited lower prices, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 50% credited sales volumes (where price increases show up), 23% cited usual seasonal change, and 11% cited labor costs.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-seven percent of owners reported all credit needs met and 60% said they were not interested in a loan. A net 6% reported their last loan was harder to get than in previous attempts. Two percent of owners reported that financing was their top business problem, down two points from May. Credit remains available but the price is rising as the Federal Reserve raises its policy rate.

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 June 2023.

LABOR MARKETS

Forty-two percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from May. Thirty-five percent have openings for skilled workers (down 3 points) and 18 percent have openings for unskilled labor (down 2 points). The difficulty in filling open positions is particularly acute in the manufacturing, construction, and transportation sectors where compensation gains are more frequently reported. Openings are lowest in the agriculture and finance sectors. 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 4 points from May and 17 points below its record high reading of 32 reached in August 2021. Overall, 59 percent reported hiring or trying to hire in June, down 4 points from May. Fifty-four percent (92 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). Thirty-three percent of owners reported few qualified applicants for their open positions (up 2 points) and 21 percent reported none (down 3 points).

CAPITAL SPENDING

Fifty-three percent reported capital outlays in the last six months, down 4 points from May. Of those making expenditures, 37 percent reported spending on new equipment (down 1 point), 21 percent acquired vehicles (down 3 points), and 14 percent improved or expanded facilities (down 1 point). Eight percent spent money on new fixtures and furniture (down 4 points) and 6 percent acquired new buildings or land for expansion (down 1 point). Twenty-five percent plan capital outlays in the next few months, unchanged from May.

INFLATION

The net percent of owners raising average selling prices decreased 3 points from May to a net 29 percent seasonally adjusted, the lowest since March 2021. Unadjusted, 12 percent (unchanged) reported lower average selling prices and 43 percent (down 4 points) reported higher average prices. Price hikes were most frequent in retail (52 percent higher, 10 percent lower), construction (49 percent higher, 4 percent lower), finance (48 percent higher, 3 percent lower), and wholesale (47 percent higher, 19 percent lower). Seasonally adjusted, a net 31 percent plan price hikes (up 2 points).

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-seven percent reported all credit needs met (unchanged) and 60 percent said they were not interested in a loan (down 3 points). A net 6 percent reported their last loan was harder to get than in previous attempts (unchanged). Two percent reported that financing was their top business problem (down 2 points). A net 24 percent of owners reported paying a higher rate on their most recent loan, unchanged from May. The average rate paid on short maturity loans was 9.2 percent, 1.4 percentage points above May’s reading. This was the highest since June 2007. Twenty-eight percent of all owners reported borrowing on a regular basis (down 1 point).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 36 percent reported raising compensation, down 5 points from May. A net 22 percent plan to raise compensation in the next three months, unchanged from May. Eight percent cited labor costs as their top business problem, down 2 points from May. Twenty-four percent said that labor quality was their top business problem (unchanged). The frequency of reports of positive profit trends was a net negative 24 percent, up 2 points from May. Among owners reporting lower profits, 28 percent blamed weaker sales, 24 percent blamed the rise in the cost of materials, 13 percent cited the usual seasonal change,10 percent cited labor costs, 8 percent cited lower prices, and 4 percent cited higher taxes or regulatory costs.

SALES AND INVENTORIES

A net negative 10 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 2 points from May. The net percent of owners expecting higher real sales volumes improved 7 points to a net negative 14 percent. The net percent of owners reporting inventory increases decreased 1 point to a net negative 3 percent. Not seasonally adjusted, 14 percent reported increases in stocks (down 1 point) and 13 percent reported reductions (down 1 point). Fourteen percent of owners recently reported that supply chain disruptions still have a significant impact on their business (down 6 points). Another 28 percent reported a moderate impact (down 4 points), and 42 percent reported a mild impact (up 11 points). A net negative 4 percent of owners viewed current inventory stocks as “too low” in June, down 1 point from May. By industry, shortages are reported most frequently in transportation (18 percent), services (12 percent), and retail (9 percent). A net negative 3 percent of owners plan inventory investment in the coming months, down 1 point from May.

COMMENTARY

2023 is half over, no sign yet of the anticipated recession (as predicted by some Fed staff, many economists, but not the FOMC though). It does look like the economy is slowing down, but “data” are not recessionary – except for the leading indicators which continue to get more negative. So where is the recession hiding? Housing seems to have bottomed and is moving up modestly, consumer spending is flat but not headed for the exits, credit statistics are flashing some problems but not critical, there are some large city real estate problems, but not widespread.

Consumer sentiment (Univ. of Michigan) has stopped falling (85.5 in June 2021, 50.0 in June 2022, 64.4 in June 2023) and small business optimism may have bottomed as well (June Index is the highest reading since Nov. 2022). Consumer spending grew 2.8% in the first quarter and will be the key determinant of GDP growth in the second quarter. On the down side, only 19% of consumers think government economic policy is “good,” 45% think it is “poor,” and a net negative 40% of small business owners expect business conditions to improve.

All eyes are on the Federal Reserve, which has signaled that it might raise interest rates by half a point (50 basis points) by year end. Higher rates will discourage borrowing to finance spending of all types, including capital spending which is needed to improve productivity and real incomes. Higher interest rates lead to lower asset values because a risk-free return on Treasury bonds of 4% or higher beats investing in a risky business venture (which would create new jobs if successful). Stock markets will react negatively as a rate hike looks more likely.

Small business owners remain very pessimistic about future business conditions and their sales prospects. But in some industries, such as construction, health care, transportation and some consumer services, spending and therefore labor demand remains strong. But overall, the number of firms reporting employment gains has been falling gradually. The government keeps reporting large employment gains but it is not clear where they find them. Apparently not on Main Street according to small business owners. Capital spending and inventory investment are down. Overall, economic growth is falling. This will help put a damper on inflation, but at the cost of lower employment.