Small business optimism limited by tight labor market, inflation

Small business economic sentiments remained negative in October amid tight labor market conditions and continued inflation, according to the National Federation of Independent Business

The index for small business optimism fell 0.1 points to 90.7, the 22nd straight month that it has fallen below the 50-year average of 98. Twenty-three percent of owners cited labor quality as their most pressing business problem. 

Sixty-one percent reported hiring or trying to hire last month, with the vast majority seeing few or no qualified applicants for open positions. A net 24 percent expected to raise compensation in the next three months, up one point from September. Forty-three percent of owners reported job openings that were hard to fill in October, unchanged from the previous month but still high. 

Twenty-two percent of owners cited inflation as the most pressing issue in operating their business, down one point from September. According to the Bureau of Labor Statistics, the consumer price index increased 3.2 percent from a year ago in October, but was unchanged for the month. A net 30 percent of owners raised average selling prices in October, up one point from the previous month. Thirty-three percent expect to raise prices in the coming months.

NFIB Chief Economist Bill Dunkelberg said small business owners feel the need to raise prices as the pace of recent sales growth is more sluggish than the 4.9 percent increase in Real GDP reported by the Bureau of Economic Analysis in the third quarter of this year.  

A net negative 43 percent of owners expected business conditions to improve over the next six months, which is historically low but unchanged from September. A net negative 17 percent of owners reported higher nominal sales in the past three months, down nine points from September and its lowest reading since July 2020. The frequency of positive profit trend reports was a net negative 32 percent, down eight points from September amid weaker sales, rising materials costs and other factors.

“The October data shows that small businesses are still recovering, and owners are not optimistic about better business conditions,” Dunkelberg said. “Small business owners are not growing their inventories as labor and energy costs are not falling, making it a gloomy outlook for the remainder of the year.”

Other report findings included:

  • Fifty-seven percent of owners made capital outlays in the last six months, which was unchanged from September. 
  • The percentage of small business owners expecting real sales to grow increased three points from September to a net negative 10 percent.
  • The percentage of owners reporting inventory gains fell three points to a net negative 6 percent. “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,” Dunkelberg added. “Investment is needed to address labor supply chain problems which still persist in the current environment.”