Small business optimism remains stunted amid high inflation and staff shortages, but consumer spending continues to drive hiring and buoy the economy, according to the National Federation of Independent Business.
The NFIB’s Small Business Optimism Index increased 0.4 points in May to 89.4, its 17th straight month of being below the 49-year historical average of 98. Small business owners expecting better business conditions over the next six months fell one point to a net negative 50 percent.
“Small business owners are expressing concerns for future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “Supply chain disruptions and labor shortages will continue to limit the ability of many small firms to meet the demand for their products and services, while less severe than last year’s experience.”
Inflation remained a top concern and continued to hinder the economic outlook, even as inflation only increased at a 4 percent annual rate last month, its lowest rise in two years. Twenty-five percent of owners listed inflation as their No. 1 problem in operating their business, up two points from April. A net 32 percent of owners raised average selling prices, the lowest percentage since March 2021. A net negative 21 percent of owners expect real sales to be higher. The frequency of positive profit trends reports was a net negative 26 percent, down three points from April, as owners cited weaker sales and the rising cost of materials.
Twenty-four percent of owners cited labor quality as their top challenge as the vast majority who looked for new workers reported seeing few or no qualified applicants. Forty-four percent of owners had job openings that were hard to fill, down one point from April but still a historically high number. Still, 63 percent of owners reported hiring or trying to hire last month, up three points from April. Nineteen percent plan to create new jobs in the next three months. Forty-one percent raised compensation, and a net 22 percent expect to raise pay in the next three months.
“The difficulty in filling open positions is particularly acute in the construction, transportation and manufacturing sectors where compensation gains are more frequently reported,” the NFIB stated. “Openings are lowest in the agriculture and finance sectors.”
Business investments continued at a solid pace. Fifty-seven percent of owners reported making capital outlays in the last six months, up one point from April. Of those who made expenditures, 38 percent spent on new equipment, 24 percent acquired vehicles, 15 percent improved or expanded facilities and 12 percent invested in new fixtures and furniture.
“Small business owners are clearly in a recession mood, expressing great concern for future business conditions,” the NFIB stated. “But until customers stop coming in, owners — especially in services — will continue to try to hire workers, increasing compensation to attract applicants and retain their current workforce. If inflation shows signs of cooling and the Fed relents — pause, but no rate cuts until inflation really declines — that will increase real wages now being paid and improve optimism for the future.”