U.S. Small Business Confidence Drops Amid Inflation Concerns

Last month, small business sentiment in the U.S. fell to its lowest level in nearly 9-1/2 years due to concerns surrounding inflation. Yet, at the same time, demand for labor remains more substantial than expected as companies continue to pursue growth.

According to the National Federation of Independent Business (NFIB), its Small Business Optimism Index dropped 3.6 points to 89.5 out of 110 in June. That is its lowest level in nine years, since January 2013. It is also the sixth consecutive month below the 48-year average of 98. The lowest reading ever recorded was 81.55 in March 2009.

Roughly a third of business owners (34%) reported that inflation was their most significant single problem, representing an increase of six points since May 2022 and the highest level since Q4 of 1980. In addition, the percentage of small-business owners that expect circumstances to improve in the next six months fell seven points to its lowest point ever recorded, a net negative of 61%. The agency has tracked the small business world’s optimism level for the past 48 years.

Consumers are facing higher prices due to global supply chain issues, Russia’s war on Ukraine, and the result of government fiscal stimuli early in the COVID-19 pandemic. As a result, inflation increased 8.6% year-over-year in May. In addition, companies raise prices as manufacturing prices jump. According to the NFIB report, 69% of owners raised average selling prices as many expect sales to fall over the year, and 39% of owners said the supply chain issues significantly impacted their business.

{{cta('3bc9a60a-9a6a-4794-8a0f-d91beaa630d4','justifycenter')}}
Such high inflation has caused the U.S. Federal Reserve to put the economy on a recession watch, raising its policy rate by 150 basis points since March 2022. The Fed is also expected to increase its overnight interest rate by 75 more basis points this month. Their upcoming policy meeting is July 26-27. They are currently pricing in a nearly 80% probability of a total percentage-point rise at that meeting.

Also, yields on longer-term Treasuries dropped, making the yield-curve inversion its most pronounced in more than 20 years. An inversion is seen as a forewarning of an economic downturn because investors anticipate a growth slowdown. Rate-futures trading shows that investors expect the Fed will need to start cutting interest rates again by mid-2023. Central banks in other countries are also feeling the pressure. For example, the Bank of Canada just raised its benchmark interest rate by 100 basis points to reign in inflation. This surprise move was its most significant hike in almost 24 years.


But even with higher borrowing costs and recession concerns, the demand for labor has not slowed down.

Even as the job market is strong, companies are still grappling with labor shortages that are a significant challenge for small businesses. In the same NFIB survey, half of the business owners (50%) reported job openings they could not fill in June. That number is down one point from May’s reporting, which tied the prior record high. These job vacancies are for both skilled and unskilled labor. Worker shortages are the highest in the construction, manufacturing, and services sectors. Plus, 19% of small business owners plan to create new jobs in the next three months. And the U.S. Labor Department reports that the market for job seekers is going strong, with the economy adding 372,000 jobs in June. These signals that owners are still seeing opportunities for growth and raise hopes that any economic downturn will be short-lived.

{{cta('e096af53-8517-4be2-bd19-d2c94caa702d','justifycenter')}}
Additionally, nearly half of respondents (48%) said they have had to raise wages for existing employees as the hiring problems persist due to unqualified applicants—28% plan to increase salaries in the next three months. A whopping 94% of small businesses reported few or zero qualified applicants for existing job openings. The Labor Department recently said there were 11.3 million open jobs at the end of May, which topped 10 million for the eighth straight month. 8% of business owners cited labor costs as the most significant problem facing their operations, while 23% cited labor quality. Overall, the current level of openings is more than 20 percentage points higher than the historical average. Openings are the lowest in the finance and agriculture industries.

On a positive note, Americans have high confidence in the country’s small businesses. A recent Gallup Poll Confidence Survey showed that 68% of Americans have tremendous confidence in small businesses.

In other positive news, the latest Small Business Recovery Report by Kabbage shows new confidence among small business owners despite recession fears. The report tracks recovery trends and the growth outlook of 550 small business owners. For most respondents, the pandemic led to a positive outlook on an uncertain economic future. U.S. small business owners remain confident even as most are expecting a recession. While 83% of owners are concerned that there will be a recession soon, 80% have confidence that they can withstand it. Of these confident respondents, a third of them cited the pandemic as the top reason they feel this way, reporting that it helped them find a greater sense of resilience and preparedness in the future despite economic unrest.

The report also shows that 45% of businesses are trying new competitive strategies before the pandemic in light of a complex market. A combined 57% of medium and large companies and 29% of the smallest small businesses reported branding as the main differentiator from their competition. In addition, there has been a significant uptick in marketing among small businesses. A combined 44% of medium and large small businesses cited that they are now marketing through social media and digital channels that differ from their competitors.

Share This Post