August 2023 Report: Prices Rising Slightly on Main Street as Inflation Remains a Top Business Problem

September 17, 2023

NFIB’s Small Business Optimism Index decreased 0.6 of a point in August to 91.3, the 20th consecutive month below the 49-year average of 98. Twenty-three percent of small business owners reported that inflation was their single most important business problem, up two points from last month. The net percent of owners raising average selling prices increased two points to a net 27% (seasonally adjusted), still at an inflationary level.

Key findings include:

Small business owners expecting better business conditions over the next six months deteriorated seven points from July to a net negative 37%, however, 24 percentage points better than last June’s reading of a net negative 61% but still at recession levels.
Forty percent of owners reported job openings that were hard to fill, down two points from July but remain historically high.
The net percent of owners who expect real sales to be higher decreased two points from July to a net negative 14%.

As reported in NFIB’s monthly jobs report, 40% (seasonally adjusted) of all owners reported job openings they could not fill in the current period. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 17% planning to create new jobs in the next three months.

Fifty-six percent reported capital outlays in the last six months, up one point from July. Of those making expenditures, 37% reported spending on new equipment, 24% acquired vehicles, and 17% improved or expanded facilities. Eleven percent spent money on new fixtures and furniture and 4% acquired new buildings or land for expansion. Twenty-four percent of owners plan capital outlays in the next few months, down three points from July.

A net negative 14% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, the lowest reading since August 2020. The net percent of owners expecting higher real sales volumes declined two points to a net negative 14%.

The net percent of owners reporting inventory gains declined four points to a net negative 7%. Not seasonally adjusted, 11% reported increases in stocks and 16% reported reductions. A net negative 5% of owners viewed current inventory stocks as “too low” in August, down one point from July. By industry, shortages are the most frequent in retail (9%), finance (7%), manufacturing (7%), and services (7%). Zero percent of owners plan inventory investments in the coming months, up two points from July.

The net percent of owners raising average selling prices increased two points from July to a net 27% (seasonally adjusted). Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, up two points.

Unadjusted, 12% reported lower average selling prices and 38% reported higher average prices. Price hikes were the most frequent in finance (52% higher, 7% lower), construction (51% higher, 6% lower), retail (45% higher, 11% lower), and wholesale (36% higher, 20% lower). Seasonally adjusted, a net 30% plan price hikes.

Seasonally adjusted, a net 36% reported raising compensation, down two points from July. A net 26% of owners plan to raise compensation in the next three months, up five points.

Eight percent of owners cited labor costs as their top business problem, down two points from July. Twenty-four percent said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 25%, up five points. Among owners reporting lower profits, 28% blamed weaker sales, 24% blamed the rise in the cost of materials, 15% cited labor costs, 10% cited lower prices, 5% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs. For owners reporting higher profits, 45% credited sales volumes, 29% cited usual seasonal change, and 12% cited higher selling prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-seven percent reported all credit needs met and 59% said they were not interested in a loan. A net 4% reported their last loan was harder to get than in previous attempts.

Two percent of owners reported that financing was their top business problem. A net 24% of owners reported paying a higher rate on their most recent loan.

The NFIB Research Center has collected Small Business Economic Trends data with quarterly surveys since the fourth 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 August 2023.

LABOR MARKETS

Forty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down 2 points from July. Thirty-five percent have openings for skilled workers (down 1 point) and 18 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction, services, and manufacturing sectors. Openings are lowest in the transportation and finance sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 17 percent planning to create new jobs in the next three months, unchanged from July and 15 points below its record high reading of 32 percent reached in August 2021. Overall, 59 percent reported hiring or trying to hire in August, down 2 points from July. Fifty-four percent (92 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 2 points). Thirty-three percent of owners reported few qualified applicants for their open positions (unchanged) and 21 percent reported none (down 2 points). Labor quality is the most frequently identified most important business problem (24 percent).

CAPITAL SPENDING

Fifty-six percent reported capital outlays in the last six months, up 1 point from July. Of those making expenditures, 37 percent reported spending on new equipment (down 1 point), 24 percent acquired vehicles (up 2 points), and 17 percent improved or expanded facilities (up 2 points). Eleven percent spent money on new fixtures and furniture (unchanged) and 4 percent acquired new buildings or land for expansion (down 2 points). Twenty-four percent plan capital outlays in the next few months, down 3 points from July. 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. Investment is needed to address labor supply chain problems which still persist in the current environment.

INFLATION

The net percent of owners raising average selling prices increased 2 points from July to a net 27 percent seasonally adjusted. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, up 2 points from last month. Unadjusted, 12 percent (down 2 points) reported lower average selling prices and 38 percent (down 2 points) reported higher average prices. Price hikes were most frequent in finance (52 percent higher, 7 percent lower, as interest rates rise), construction (51 percent higher, 6 percent lower), retail (45 percent higher, 11 percent lower), and wholesale (36 percent higher, 20 percent lower). Seasonally adjusted, a net 30 percent plan price hikes (up 3 points).

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (down 1 point). Twenty-seven percent reported all credit needs met (up 2 points) and 59 percent said they were not interested in a loan (down 3 points). A net 4 percent reported their last loan was harder to get than in previous attempts (down 2 points). Two percent reported that financing was their top business problem (down 2 points). A net 24 percent of owners reported paying a higher rate on their most recent loan, up 1 point from July. The average rate paid on short maturity loans was 9.0 percent, half of a percentage point above last month. Twenty-eight percent of all owners reported borrowing on a regular basis (up 1 point).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 36 percent reported raising compensation, down 2 points from July. A net 26 percent plan to raise compensation in the next three months, up 5 points from July. Eight percent cited labor costs as their top business problem, down 2 points from July. Twenty-four percent said that labor quality was their top business problem (up 1 point). The frequency of reports of positive profit trends was a net negative 25 percent, up 5 points from July. Among owners reporting lower profits, 28 percent blamed weaker sales, 24 percent blamed the rise in the cost of materials, 15 percent cited labor costs, 10 percent cited lower prices, 5 percent cited the usual seasonal change, and 3 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 45 percent credited sales volumes, 29 percent cited usual seasonal change, and 12 percent cited higher selling prices.

SALES AND INVENTORIES

A net negative 14 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 1 point from July. This was the lowest reading since August 2020. The net percent of owners expecting higher real sales volumes declined 2 points to a net negative 14 percent. The net percent of owners reporting inventory gains declined 4 points to a net negative 7 percent. Not seasonally adjusted, 11 percent reported increases in stocks (down 3 points) and 16 percent reported reductions (up 2 points). A net negative 5 percent of owners viewed current inventory stocks as “too low” in August, down 1 point from July. By industry, shortages are reported most frequently in retail (9 percent), finance (7 percent), manufacturing (7 percent), and services (7 percent). Shortages in construction (6 percent) have been reduced because home sales have slowed dramatically due to higher interest rates. Zero percent of owners plan inventory investment in the coming months, up 2 points from July.

COMMENTARY

The first half of 2023 is “in the bank,” not a bad performance. But can this performance be repeated in the third and fourth quarter shows? Thirty-two percent of the growth came from business investment, much of this funded by Congressionally directed spending subsidies to favored business activities (e.g., chips, EVs). Twenty-three percent of the growth was due directly to government purchases of goods and services. Forty-five percent of the growth was fueled by consumer spending. Weaker residential spending, an adverse trade deficit and a decline in private inventories taken together subtracted about half a percent from the growth percentage. The personal saving rate has declined to its lowest level since 2022, financing the consumer along with increased credit use, the decline in inflation that increased the real value of incomes earned, and continued compensation growth. All that said, it appears that growth in the third quarter could outperform the first half of the year, even with very low employment growth to date. September would have to be an exceptionally bad month to negate the solid economic data that came out of July and August.

Main Street seems to be drifting sideways, unable to hire the additional workers it has been seeking all year to take advantage of the persistent strength in consumer spending. Borrowing costs have skyrocketed although credit has remained available. Since January 2022, expectations for real sales gains have deteriorated, falling 11 percentage points to a net negative 14 percent. Expectations for future business conditions are similarly negative, with only 5 percent expecting improved conditions, but 48 percent expecting conditions to deteriorate. Meantime, regulations continue to flow from Federal agencies such as the recent proposed regulation for ceiling fans which is estimated to add twice as much to the cost of a fan than can be saved in reduced electrical use. What small business owner can comb through tens of thousands of Federal Register pages to find changes that might impact their firm?

Inflation continues to exceed the Fed’s percent objective, raising a question about further interest rate increases. Although small business owners reported paying rates as high as 19 percent (average) when we had double-digit inflation, it seems that in the current environment a quarter point rise in the rate will provide little additional spending restraint, which is the goal of the Fed. Rates are very high and will continue to discourage spending, including in the housing market as long as rates remain high.

Our historically reliable predictors of recession are still predicting, sooner or later they will be correct. Meantime, those who make a living analyzing the economy are pulling back the severity of their forecasts, drifting toward the “soft landing” scenario. But will that provide enough inflation relief to restore a (not so great) 2 percent inflation rate that requires your income to rise 2 percent every year just to stay even? It’s time to “muddle through” the year and see what 2024 and the elections hold for us, bigger government or more entrepreneurship.

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