June 2022 Report: Small Business Expectations for Future Conditions Hits All-Time Low

July 13, 2022

The NFIB Small Business Optimism Index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year.

Inflation continues to be a top problem for small businesses with 34% of owners reporting it was their single most important problem in operating their business, an increase of six points from May and the highest level since quarter four in 1980.

Key findings include:

The net percent of owners who expect real sales to be higher decreased 13 points from May to a net negative 28%, a severe decline.
Fifty percent of owners reported job openings that could not be filled, down one point from May, but historically very high.
The net percent of owners raising average selling prices decreased three points to a net 69% seasonally adjusted, following May’s record high reading.

As reported in NFIB’s monthly jobs report, owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 19% planning to create new jobs in the next three months, but down seven points from May. Ninety-four percent of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill.

Fifty-one percent of owners reported capital outlays in the last six months, down two points from May. Of those making expenditures, 37% reported spending on new equipment, 23% acquired vehicles, and 14% improved or expanded facilities. Five percent acquired new buildings or land for expansion and 13% spent money for new fixtures and furniture. Twenty-three percent of owners plan capital outlays in the next few months, down two points from May.

A net negative 2% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down three points from May. The net percent of owners expecting real sales volumes decreased 13 points to a net negative 28%.

The net percent of owners reporting inventory increases fell three points to a net negative 4%. Thirty-nine percent reported that supply chain disruptions have had a significant impact on their business. Another 30% report a moderate impact and 23% report a mild impact. Only 6% report no impact from recent supply chain disruptions.

A net 5% of owners viewed current inventory stocks as “too low” in June, down three points from May and still surprisingly high. By industry, shortages are reported most frequently in manufacturing (19%), retail (18%), agriculture (18%), construction (16%), and non-professional services (15%). A net negative 2% of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices decreased three points from May to a net 69% (seasonally adjusted). Price raising activity over the past 12 months has escalated, reaching levels not seen since the early 1980s when prices were rising at double digit rates.

Unadjusted, 4% of owners reported lower average selling prices and 69% reported higher average prices. Price hikes were the most frequent in retail trades (80% higher, 3% lower), transportation (78% higher, 0% lower), construction (75% higher, 4% lower), and wholesale (69% higher, 7% lower). Seasonally adjusted, a net 44% plan price hikes.

A net 48% (seasonally adjusted) reported raising compensation, down one point from May. A net 28% of owners plan to raise compensation in the next three months, up three points from May and historically very high. Eight percent of owners cited labor costs as their top business problem and 23% said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 25%, down one point from May. Among the owners reporting lower profits, 30% blamed the rise in the cost of materials, 16% blamed weaker sales, 14% cited labor costs, 14% cited lower prices, 7% cited the usual seasonal change, and 2% cited higher taxes or regulatory costs. For owners reporting higher profits, 51% credited sales volumes, 19% cited higher prices, and 17% cited usual seasonal change.

One percent of owners reported that all their borrowing needs were not satisfied. Twenty-seven percent reported all credit needs met and 61% said they were not interested in a loan. A net 3% reported their last loan was harder to get than in previous attempts. Only 1% reported that financing was their top business problem.

The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are randomly drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in June 2022.

LABOR MARKETS

Fifty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 1 point from last month’s 48-year record high (also in September). Forty-two percent have openings for skilled workers (unchanged) and 22 percent have openings for unskilled labor (down 3 points). The difficulty in filling open positions is particularly acute in the construction, manufacturing, services, and retail sectors. Openings are lowest in the finance and agriculture sectors. Overall, however, the current level of openings is over 20 percentage points higher than the historical average. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 19 percent planning to create new jobs in the next three months, but down 7 points from May. Sixty percent (94 percent of those hiring or trying to hire) of owners reported few or no qualified applicants for the positions they were trying to fill (down 1 point). Thirty-three percent of owners reported few qualified applicants for their open positions (unchanged) and 27 percent reported none (down 1 point, but just 2 points shy of the 48-year record high).

CAPITAL SPENDING

Fifty-one percent reported capital outlays in the last six months, down 2 points from May. A recovery in investment will be needed to spark an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions. Of those making expenditures, 37 percent reported spending on new equipment (up 1 point), 23 percent acquired vehicles (up 2 points), and 14 percent improved or expanded facilities (down 1 point). Five percent acquired new buildings or land for expansion (down 1 point) and 13 percent spent money for new fixtures and furniture (up 1 point). Twenty-three percent plan capital outlays in the next few months, down 2 points from May.

INFLATION

The net percent of owners raising average selling prices decreased 3 points from May to a net 69 percent seasonally adjusted. Unadjusted, 4 percent (up 1 point) reported lower average selling prices and 69 percent (down 2 points) reported higher average prices. Price hikes were most frequent in retail trades (80 percent higher, 3 percent lower), transportation (78 percent higher, 0 percent lower), construction (75 percent higher, 4 percent lower), and wholesale (69 percent higher, 7 percent lower). Seasonally adjusted, a net 44 percent plan price hikes (down 3 points).

CREDIT MARKETS

One percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-seven percent reported all credit needs met (up 5 points) and 61 percent said they were not interested in a loan (down 4 points). A net 3 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 (unchanged). A net 16 percent of owners reported paying a higher rate on their most recent loan, up 2 points from May. The average rate paid on short maturity loans was 5.3 percent. Twenty-five percent of all owners reported borrowing on a regular basis (up 2 points).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 48 percent reported raising compensation, down 1 point from May. A net 28 percent plan to raise compensation in the next three months, up 3 points from May. Eight percent cited labor costs as their top business problem, down 3 points from May, and 23 percent said that labor quality was their top business problem (unchanged). Labor quality remains in second place behind “inflation.” The frequency of reports of positive profit trends was a net negative 25 percent, down 1 point from May. Among owners reporting lower profits, 30 percent blamed the rise in the cost of materials, 16 percent blamed weaker sales, 14 percent cited labor costs, 14 percent cited lower prices, 7 percent cited the usual seasonal change, and 2 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 51 percent credited sales volumes,19 percent cited higher prices, and 17 percent cited usual seasonal change.

SALES AND INVENTORIES

A net negative two percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 3 points from May. The net percent of owners expecting higher real sales volumes decreased 13 points to a net negative 28 percent. The net percent of owners reporting inventory increases fell 3 points to a net negative 4 percent. Not seasonally adjusted, 18 percent reported increases in stocks and 18 percent reported reductions. Thirty-nine percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 30 percent report a moderate impact and 23 percent report a mild impact. Only 6 percent report no impact from recent supply chain disruptions. A net 5 percent of owners viewed current inventory stocks as “too low” in June, down 3 points from May. A net negative 2 percent of owners plan inventory investment in the coming months down 3 points from May.

COMMENTARY

A recession is the period of time between a peak in economic activity and the resumption of real growth after a period of decline. Because data are available only after an event, a recession can’t be identified with acceptable precision until after it has occurred. A group of economists at the National Bureau of Economic Research (NBER) meet regularly to make such assessments, using available data. Some observers feel that the economy is already in a recession. We won’t know officially until the facts are all in unless the economy makes a hard decline, and the economic situation becomes obvious.

It’s a mixed picture on Main Street. Housing is still booming (but slowing) and restaurant sales continue to trend higher. Owners can’t find enough workers, not characteristic of a recession where unemployment is high, not low. Job openings and hiring plans are at record levels. The percent of owners raising compensation is high too. The percent of owners raising selling prices is historically high. Doesn’t sound like a recession, at least from the employment side.

From the production (output, sales) side, the picture is different. More firms are reporting sales declines than increases, and they expect sales to keep falling. More firms plan to reduce inventory rather than build it. Of course, recessions don’t just suddenly appear unless, like in 2020, when the economy is forced to shut down. That produced the shortest recession on record, just two months from peak to trough, then recovery. There are always warning signs, indicators that consistently anticipate the declines of sales and employment in a recession, generally termed leading indicators. Declines in the net percent expecting better business conditions have always preceded downturns in economic activity. At a net -61%, the lowest in 48 years, it is strongly indicating bad times for the economy to come. In concurrence, those expecting real sales growth is also historically low, expected better credit conditions has deteriorated and only 3% of small business owners think the current period is a good time to expand their business. And inflation and the percent of owners raising prices are at levels not seen since the recessions of the early 1980s.

These indicators make a very strong case for a decline in economic activity. How long and how severe is now the question. It appears that real GDP growth was negative in the first two quarters of the year, some say that is a recession. But employment has yet to yield to the forces of decline, a good sign. However this plays out, small business owners are bracing for challenging times ahead.

Bill Dunkelberg is Chief Economist at the National Federation of Independent Business (NFIB)