December 2023 Report: Inflation Returns as Top Business Problem on Main Street

February 5, 2024

The NFIB Small Business Optimism Index increased 1.3 points in December to 91.9, marking the 24th consecutive month below the 50-year average of 98. Twenty-three percent of small business owners reported that inflation was their single most important problem in operating their business, up one point from last month, and replacing labor quality as the top concern.

Key findings include:

Small business owners expecting better business conditions over the next six months increased six points from November to a net negative 36% (seasonally adjusted), and 25 percentage points better than last June’s reading of a net negative 61%.
Seasonally adjusted, a net 29% of owners plan to raise compensation in the next three months, down one point from November.
The net percent of owners raising average selling prices was unchanged from November at a net 25% (seasonally adjusted).
The net percent of owners who expect real sales to be higher increased four points from November to a net negative 4% (seasonally adjusted), the highest reading since January 2022.

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 16% planning to create new jobs in the next three months.

Fifty-eight percent of owners reported capital outlays in the next six months, down three points from November. Of those making expenditures, 40% reported spending on new equipment, 22% acquired vehicles, and 19% improved or expanded facilities. Eleven percent spent money on new fixtures and furniture and 5% acquired new buildings or land for expansion. Twenty-four percent (seasonally adjusted) plan capital outlays in the next few months, up one point from November.

A net negative 11% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, a six-point improvement from November. The net percent of owners expecting higher real sales volumes improved four points to a net negative 4%.

The net percent of owners reporting inventory gains increased one point to a net negative 2%. Not seasonally adjusted, 12% reported increases in stocks and 15% reported reductions. A net negative 5% of owners viewed current inventory stocks as “too low” in December, down five points from November. By industry, shortages are reported most frequently in the finance (16%), retail (12%), and manufacturing (11%) sectors. A net negative 5% of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices was unchanged from November at a net 25% seasonally adjusted. Seasonally adjusted, a net 32% plan price hikes in the next three months.

Price hikes were the most frequent in finance (52% higher, 12% lower), retail (49% higher, 8% lower), construction (41% higher, 12% lower), services (36% higher, 5% lower), and professional services (33% higher, 4% lower).

Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, up one point from last month and surpassing labor quality as the top problem.

Seasonally adjusted, a net 36% reported raising compensation, unchanged from November. A seasonally adjusted net 29% plan to raise compensation in the next three months. Nine percent of owners cited labor costs as their top business problem, up one point from November. Twenty percent said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 25%, seven points better than November. Among the owners reporting lower profits, 31% blamed weaker sales, 17% blamed the rise in the cost of materials, 16% cited lower prices, and 9% cited labor costs. For owners reporting higher profits, 48% credited sales volumes, 19% cited usual seasonal change, and 14% cited higher selling prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-five percent reported all credit needs met and 61% said they were not interested in a loan. A net 8% reported their last loan was harder to get than in previous attempts.

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 December 2023.

LABOR MARKETS

Forty percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from November. Thirty-three percent have openings for skilled workers (unchanged) and 14 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction and transportation sectors. Job openings in construction were up 9 points from last month and over half have a job opening they can’t fill. Openings are lowest in the agriculture and finance sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 16 percent planning to create new jobs in the next three months, down 2 points from November and 16 points below its record high reading of 32 percent reached in August 2021. Overall, 55 percent reported hiring or trying to hire in December, up 1 point from November. Forty-nine percent (89 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). Twenty-eight percent of owners reported few qualified applicants for their open positions (up 2 points) and 21 percent reported none (down 3 points). Reports of labor quality as the single most important problem for business owners decreased 4 points to 20 percent, and labor cost rose 1 point to 9 percent in the list of problems.

CAPITAL SPENDING

Fifty-eight percent reported capital outlays in the last six months, down 3 points from November. A recovery in investment is needed to support an improvement in productivity, but this is unlikely to occur while owners remain pessimistic about future business conditions and lending standards tighten with high interest rates. Longer term, the worker shortage has given firms an incentive to invest in labor saving technology. But, overall, capital spending is not strong historically. Of those making expenditures, 40 percent reported spending on new equipment (down 1 point), 22 percent acquired vehicles (down 1 point), and 19 percent improved or expanded facilities (up 2 points). Eleven percent spent money on new fixtures and furniture (unchanged) and 5 percent acquired new buildings or land for expansion (down 1 point). Twenty-four percent (seasonally adjusted) plan capital outlays in the next few months, up 1 point from November.

INFLATION

The net percent of owners raising average selling prices was unchanged from November at a net 25 percent seasonally adjusted. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, up 1 point from last month and surpassing labor quality as the top problem. Unadjusted, 15 percent (up 1 point) reported lower average selling prices and 36 percent (unchanged) reported higher average prices. Price hikes were most frequent in finance (52 percent higher, 12 percent lower), retail (49 percent higher, 8 percent lower), construction (41 percent higher, 12 percent lower), services (36 percent higher, 5 percent lower), and professional services (33 percent higher, 4 percent lower). Seasonally adjusted, a net 32 percent plan price hikes (down 2 points).

CREDIT MARKETS

Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-five percent reported all credit needs met (unchanged) and 61 percent said they were not interested in a loan (down 2 points). A net 8 percent reported their last loan was harder to get than in previous attempts (unchanged). Five percent reported that financing was their top business problem (unchanged). A net 20 percent of owners reported paying a higher rate on their most recent loan, down 5 points from November. The average rate paid on short maturity loans was 9.8 percent, up 0.5 percentage points from last month. Twenty-nine percent of all owners reported borrowing on a regular basis (down 2 points).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 36 percent reported raising compensation, unchanged from November. A seasonally adjusted net 29 percent plan to raise compensation in the next three months, up 1 point from November. Nine percent cited labor costs as their top business problem, up 1 point from November. Twenty percent said that labor quality was their top business problem (down 4 points). The frequency of reports of positive profit trends was a net negative 25 percent, 7 points better than November. Among owners reporting lower profits, 31 percent blamed weaker sales, 17 percent blamed the rise in the cost of materials, 16 percent cited lower prices, and 9 percent cited labor costs. For owners reporting higher profits, 48 percent credited sales volumes, 19 percent cited usual seasonal change, and 14 percent cited higher selling prices.

SALES AND INVENTORIES

A net negative 11 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, a 6-point improvement from November. The net percent of owners expecting higher real sales volumes improved 4 points to a net negative 4 percent. The net percent of owners reporting inventory gains increased 1 point to a net negative 2 percent (reducing stocks on balance). Not seasonally adjusted, 12 percent reported increases in stocks (down 2 points) and 15 percent reported reductions (down 1 point). A net negative 5 percent of owners viewed current inventory stocks as “too low” in December, down 5 points from November. By industry, shortages are reported most frequently in the finance (16 percent), retail (12 percent), and manufacturing (11 percent) sectors. A net negative 5 percent of owners plan inventory investment in the coming months, down 2 points from November.

COMMENTARY

2023 is in the rear-view mirror now, but it will weigh heavily on the 2024 economy. Government spending will continue to grow faster than the overall economy. New business construction in favored segments of the economy will continue to surge, buoyed by generous subsidies and tax breaks. President Biden will continue to promise student loan forgiveness that is unlikely to be delivered, all while the budget deficit grows. The need to refinance trillions of our $34 trillion in debt will keep interest rates high. Consumer spending will be slowed due to excess debt and a slowing job market. And prices will remain elevated, the Consumer Price Index is 20% higher than it was in 2020. Incomes did not rise as much, so real incomes fell. Used car prices are 30% higher, new cars up 20%, etc. The Fed will start cutting its policy rate, a stimulus for financial markets and mortgage rates but not much help for most consumers. Overall, the growth rate will most likely be lower than last year, the economy will slow down, possibly delivering that long predicted recession by year end.

Small business owners remain very pessimistic about economic prospects this year and did not notice the third quarter surge in the economy last year. When Trump won the 2016 election, small business optimism surged to a 50-year record high level and remained elevated until Covid related policies shut down much of the economy. The Index jumped from 98 in November 2016 to 106 in December and stayed well above 100 until February 2020. The election in November will again have a major impact on optimism, spending, and growth once again. In 2023, the Index averaged 91, the 50-year average is 98 (Yup, 50 years collecting information from random samples of our 300,000 + member firms!). Meantime, the government is actively spewing out new regulations and looking for ways to spend more on favored projects. There has been no push to raise taxes to pay for all this, the Administration seems content to borrow all the money it needs and leave the repayment and interest payment issues to future governments. Economic growth will be weak, worsening the burden of the debt on the private economy.

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