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main points
- The outlook for small business owners fell to a six-month low when inflation was at pandemic-era highs, according to the NFIB’s Small Business Optimism Index.
- Small business owners are most concerned about inflation, which affects how much they spend on materials. At the same time, profits and nominal sales fell, causing more small business owners to slow down the pace of price increases.
- Other concerns among small business owners include persistent supply chain issues, difficulties filling open positions and finding quality talent.
Last week, the National Federation of Independent Business (NFIB) released the results of its December 2022 Small Business Optimism Index. As it turns out, small business owners don’t hold out much hope for the immediate future. In fact, they have not felt this pessimistic since inflation peaked at 9.1% in June 2022.
In an environment where economic indicators appear to be positive, this is somewhat confusing. Inflation is trending down. Unemployment is low.
So why are small business owners feeling pessimistic? Q.ai is here to help you navigate is a confluence of factors.
Inflation is down, but it’s still a problem
In December 2022, the annual inflation rate fell to 6.5%, continuing the downward trend. While it’s encouraging that it’s headed in the right direction, 6.5% inflation is still incredibly high.
In the NFIB survey, 32 percent of business owners said inflation was the number one issue holding them back from doing business. Thirty percent of businesses reporting lower profits cited higher material costs as the main factor affecting their bottom line.
Nominal sales fall ahead of further rate hikes
If inflation is higher, why not just raise prices? Part of the problem is that sales for small business owners have declined over the past few months.
Overall, the frequency of positive profit trends fell to 30%, down 8% from November. After inflation, the second-most-cited cause of declining profits for businesses was lower sales.
Some of this is to be expected. Part of the Fed’s goal of raising interest rates is to curb discretionary spending by consumers. Whether people decide the prices aren’t worth it or are being forced to divert resources toward necessities like rent and food, customers overall seem to be spending less often at small businesses.
With inflation still high, the Fed plans to hike rates further in 2023. The pace of these increases could ultimately affect consumer spending on small businesses in the coming months.
Supply chain disruptions persist
Running your business like a well-oiled machine means having a reliable supply chain. Over the past few years, supply chain disruptions have caused delays and distorted the balance of supply and demand across industries.
Small business owners have not been spared either. Only 13% of small business owners say the current environment has no impact on their supply chain. The remaining respondents fell into the following categories:
- 23% said it had a significant impact on their business.
- Thirty percent of respondents reported a moderate impact on their business.
- 32% of respondents said their business was slightly impacted.
Difficult to fill open positions
A tight labor market is good for workers, but bad for businesses. You need reliable, competent employees to run your business. When key positions become vacant, you risk overworking existing employees as they try to fill the vacancies.
Note that labor costs are not necessarily an issue here. While wages did grow during the pandemic, that growth never kept up with inflation and is now trending downward. Even during peak growth periods, labor costs were not a key factor driving inflation.
In fact, only 8 percent of small business owners say labor costs are their business’ top concern. Twenty-three percent of respondents said workforce quality, rather than cost, was the biggest issue affecting their bottom line, and 41 percent reported problems filling open positions.
Even with problems filling open positions, only 27% of business owners plan to increase wages in the next 3 months. That’s a 1% drop since November, which may not bode well for future wage growth.
What the gloomy outlook means for Main Street
Before the pandemic, small businesses accounted for about two-thirds of the U.S. job market. They also contribute 44% of the country’s economic activity.
If small businesses do start moving south in large numbers, it could have a negative impact on the U.S. job market. It can also have a significant impact on the local economy.
However, NFIB’s index is based on the sentiment of small business owners. While some of these businesses may have operations in the financial sector, the respondents were by and large not economists. Their struggles are worth watching, but their anxieties about the future may or may not be worth it.
What the gloomy outlook means for Wall Street
If small businesses collectively struggle, it may not have an immediate impact on stocks. Less than 1% of U.S. companies are publicly traded. While not all private companies are small businesses, there is substantial overlap between small businesses and the private sector.
If Joe’s Corner Shop closes, you may not see an immediate impact on the stock market, but if enough small businesses fail, the local economy could suffer. It could affect everything from the job market to consumer spending.
These factors could affect consumer spending on publicly traded companies, which could have a negative impact on the stock market. It could also make investors more cautious when it comes to riskier investments like stocks, which could drag on further.
the bottom line
So much of our economy is vulnerable. The current economic indicators don’t scream “recession,” but there has been so much unpredictable turbulence over the past few years that the environment we’re in feels strange and uncomfortable.
While pessimism among small business owners is never a good sign, it’s not necessarily an accurate crystal ball for what’s to come.
During these uncertain times, you may be concerned about the future of your investments. While times of economic turmoil should already be built into your long-term investing plan, there are other steps you can take to support your investments, such as using an inflation tool kit or opting in to portfolio protection.
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