from the National Federation of Independent Business
The NFIB Small Business Optimism Index fell 0.2 points in May to 99.6. May saw a slight pause in the recovery of small business optimism after steadily increasing each month in 2021. As reported in NFIB’s monthly jobs report, a record-high 48% of owners reported unfilled job openings.
Said NFIB Chief Economist William Dunkelberg:
The labor shortage is holding back growth for small businesses across the country. If small business owners could hire more workers to take care of customers, sales would be higher and getting closer to pre-COVID levels. In addition, inflation on Main Street is rampant and small business owners are uncertain about future business conditions.
Other key findings include:
- Five of the 10 Index components improved, three declined, and two were unchanged.
- The NFIB Uncertainty Index decreased one point to 79.
- Job creation plans over the next three months rose to a net 27%, up six points.
- Owners expecting better business conditions over the next six months fell 11 points to a net negative 26%.
- Earnings trends over the past three months declined four points to a net negative 11%.
Fifty-nine percent of owners reported capital outlays in the last six months, up two points from April. Of those making expenditures, 44% reported spending on new equipment, 24% acquired vehicles, and 16% improved or expanded facilities. Six percent acquired new buildings or land for expansion and 13% spent money on new fixtures and furniture. Twenty-seven percent are planning capital outlays in the next few months.
A net 7% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up four points from April. The net percent of owners expecting higher real sales volumes improved two points to a net 3%, a historically weak reading.
The net percent of owners reporting inventory increases rose one point to a net negative 1%. A net 8% of owners view current inventory stocks as “too low” in May, up one point from April and at historically high levels. A net 6% of owners plan inventory investments in the coming months, up one point from April.
The net percent of owners raising average selling prices increased four points to a net 40% (seasonally adjusted), the highest reading since April 1981. Unadjusted, 5% of owners reported lower average selling prices and 48% reported higher average prices. Price hikes were the most frequent in wholesale (65% higher, 2% lower), retail (53% higher, 5% lower), and manufacturing (47% higher, 1% lower). Seasonally adjusted, a net 43% of owners plan price hikes, up seven points.
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A net 34% (seasonally adjusted) reported raising compensation, the highest level in the past 12 months. A net 22% of owners plan to raise compensation in the next three months, up two points.
Eight percent of owners cited labor costs as their top business problem and 26% said that labor quality was their top business problem. Higher labor costs are being passed on to customers through higher selling prices.
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The frequency of reports of positive profit trends declined four points to a net negative 11%. Among owners reporting lower profits, 38% blamed weaker sales, 17% cited a rise in the cost of materials, 12% cited the usual seasonal change, 8% cited labor costs, 7% cited lower prices, and 6% cited higher taxes or regulatory costs.
For owners reporting higher profits, 60% credited sales volumes, 18% cited the usual seasonal change, and 14% cited higher prices.
Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-three percent reported all credit needs met and 62% 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. The net percent of owners reporting paying a higher rate on their most recent loan was 1%. Credit costs are at historically low levels.
Click here to view the full report.
Report Commentary
Two headlines in the bigger picture: Labor is in short supply and holding back growth, and Inflation is rampant on Main Street. The Federal Reserve is clinging to its insistence that inflation be allowed to run over 2 percent for a considerable amount of time to produce an average inflation rate of 2 percent (inflation has been below 2% for years). Yikes! Consumers didn’t mind low inflation at all. That will likely force the Federal Reserve to allow interest rates to rise to offset the depreciation caused by inflation and protect lenders (savers) who get repaid in the future when prices are higher.
Owners are passing on higher operating costs and wages much as they did in 2008 when oil was $140/bb. Today, oil is about $70/bbl and energy costs aren’t a major problem yet. But owners are finding that they must raise labor compensation to keep workers and attract new ones. This cost is being passed on in higher prices along with other costs due to supply chain problems, trade issues, and Covid-19 disruptions.
The second quarter will likely not repeat the first, but growth will still be historically strong as consumers spend the money being funneled to them by the government and through increased compensation. Consumers have a trillion or two of savings piled up and ready to go. But neither consumers or business owners are exuberant about economic prospects for the rest of the year. There is much uncertainty, about Covid, about economic policy (taxes, regulations, etc.) and politics, globally and domestically
Some other highlights of this Optimism Index include:
General Summary. The Optimism Index fell a bit in May to 99.6, a decline of 0.2 points from April. After steadily increasing in each month of 2021, May saw a slight pause in the recovery of small business optimism. The economy is doing very well currently, and owners are scrambling to take advantage of it by hiring and investing. The first five Index components in the table are at historically high levels. However, the other five components which are forward-looking expectations, are flashing yellow, indicating owners have waning confidence that the economy will be better by year end. The NFIB Uncertainty Index decreased 1 point to 79. to six months increased 7 points to 27 percent. However, the welcomed jump is not consistent with the percent of owners expecting better business conditions over the next six months which fell 7 points to a net negative 15 percent, a glum outlook.
Labor Markets. Strong job growth eased in May as small businesses struggled to find workers to fill open positions as unfilled job openings increased from 44 percent to 48 percent, seasonally adjusted. May is the fourth consecutive month setting a new record high reading for unfilled job openings. May’s reading is 26 points higher than the 48-year historical average of 22 percent. Forty percent have openings for skilled workers (up 3 points) and 27 percent have openings for unskilled labor (up 7 points). The increase in unfilled openings was accompanied by a 2- point increase in the percent that reported hiring or trying to hire in May, 61 percent. Owners have plans to fill open positions, with a seasonally adjusted net 27 percent planning to create new jobs in the next three months, sharply up 6 points from April. 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 May (up 3 points). Where there are open positions, labor quality remains a significant problem. Thirty-two percent of owners reported few qualified applicants for their open positions (up 1 point) and 25 percent reported none (up 2 points). The labor shortage remains the top problem facing owners.
Sales and Inventories. A net 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 4 points from April and marking a return to the pre-Covid sales activity. The net percent of owners expecting higher real sales volumes improved 2 points to a net 3 percent. This is an improvement but, historically, still weak. The net percent of owners reporting inventory increases rose 1 point to a net negative 1 percent. The problem is a good one – owners are selling stuff faster than they can replace the inventory. However, owners don’t expect that to continue into the second half of the year. A net 8 percent of owners view current inventory stocks as “too low” in May, up 1 point from April and at historically high levels. A net 6 percent of owners plan inventory investment in the coming months, up 1 point.
Credit Markets. Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-three percent reported all credit needs met (down 3 points) and 62 percent said they were not interested in a loan (up 3 points). A net 2 percent reported their last loan was harder to get than in previous attempts (down 1 point). One percent reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was 1 percent. The average rate paid on short maturity loans was 4.9 percent. Twenty-three percent of all owners reported borrowing on a regular basis (down 1 point).
Compensation and Earnings. Seasonally adjusted, a net 34 percent reported raising compensation (up 3 points), the highest level in the past 12 months. Raising compensation is about the only way owners have to remedy the labor shortage problem. A net 22 percent plan to raise compensation in the next three months, up 2 points. Eight percent cited labor costs as their top business problem and 26 percent said that labor quality was their top business problem, the top business concern. The frequency of reports of positive profit trends declined 4 points to a net negative 11 percent. Among owners reporting lower profits, 38 percent blamed weaker sales, 17 percent cited a rise in the cost of materials, 12 percent cited the usual seasonal change, 8 percent cited labor costs, 7 percent cited lower prices, and 6 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 60 percent credited sales volumes, 18 percent cited usual seasonal change, and 14 percent cited higher prices.
Capital Spending. Fifty-nine percent reported capital outlays in the last six months, up 2 points from April. This takes spending back into the range experienced for the last few years which was the best capital investment period in recent history. Of those making expenditures, 44 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (down 1 point), and 16 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 13 percent spent money for new fixtures and furniture (up 1 point). Twenty-seven percent plan capital outlays in the next few months, unchanged from April. Historically high numbers of owners are not optimistic about economic conditions or real sales in the second half, and this will not encourage more investment and expansion. Capital spending is critical to the improvement of worker productivity and compensation.
Inflation. The net percent of owners raising average selling prices increased 4 points to a net 40 percent, seasonally adjusted, the highest reading since April 1981. This is inflation on Main Street which means its inflation for the whole economy. The inflation spike is likely temporary according to the Fed but is being closely watched. Unadjusted, 5 percent (down 1 point) reported lower average selling prices and 48 percent (up 3 points) reported higher average prices. Price hikes were most frequent in wholesale (65 percent higher, 2 percent lower), retail (53 percent higher, 5 percent lower), and manufacturing (47 percent higher, 1 percent lower). Seasonally adjusted, a net 43 percent plan price hikes (up 7 points).
source: NFIB
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