October 2022 Report: Small Businesses Struggle with Inflation, Labor Shortages

November 10, 2022

NFIB’s Small Business Optimism Index declined 0.8 points in October to 91.3, which is the 10th consecutive month below the 49-year average of 98. Thirty-three percent of owners reported that inflation was their single most important problem in operating their business, three points higher than September’s reading and four points lower than July’s highest reading since the fourth quarter of 1979.

Key findings include:

Of the 10 Index components, two increased, seven declined, and one was unchanged.
Owners expecting better business conditions over the next six months deteriorated two points from September to a net negative 46%.
The net percent of owners raising average selling prices decreased one point to a net 50% (seasonally adjusted). Half of all firms are raising prices, that’s inflation.
The net percent of owners who expect real sales to be higher decreased three points from September to a net negative 13%.

As reported in NFIB’s monthly jobs report, 46% of owners reported job openings that were hard to fill, unchanged from September. Of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for the positions they were trying to fill.

Fifty-four percent of owners reported capital outlays in the last six months, down two points from September. Of those making expenditures, 37% reported spending on new equipment, 22% acquired vehicles, and 17% improved or expanded facilities. Eleven percent spent money on new fixtures and furniture and 6% acquired new buildings or land for expansion. Twenty-three percent plan capital outlays in the next few months.

A net negative 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, three points worse than from September. The net percent of owners expecting higher real sales volumes declined three points to a net negative 13%.

The net percent of owners reporting inventory increases improved one point to a net negative 1%. Sixteen percent of owners reported increases in stocks and 16% reported reductions as solid sales reduced inventories at many firms and owners cautiously reduced inventory purchases.

Thirty-one percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 31% report a moderate impact and 27% report a mild impact. Only 10% of owners report no impact from recent supply chain disruptions. A net zero percent of owners viewed current inventory stocks as “too low” in October, down one point from September. By industry, shortages are the most frequent in finance (18%), retail (15%), transportation (13%), services (11%), and manufacturing (11%). A net 2% of owners plan inventory investment in the coming months.

The net percent of owners raising average selling prices decreased one point from September to a net 50% (seasonally adjusted). Unadjusted, 8% of owners reported lower average selling prices and 56% reported higher average selling prices. Price hikes were the most frequent in retail (69% higher, 6% lower), wholesale (64% higher, 12% lower), construction (61% higher, 5% lower), and services (54% higher, 5% lower). Seasonally adjusted, a net 34% of owners plan price hikes.

Seasonally adjusted, a net 44% of owners reported raising compensation, down one point from September. A net 32% plan to raise compensation in the next three months, up nine points from September and the highest since October 2021. Ten percent of owners cited labor costs as their top business problem and 23% cited labor quality as their top business problem.

The frequency of reports of positive profit trends was a net negative 30%, up one point from September. Among owners reporting lower profits, 34% blamed the rise in the cost of materials, 22% blamed weaker sales, 12% cited labor costs, 12% cited lower prices, 7% cited the usual seasonal change, and 2% cited higher taxes or regulatory costs. For owners reporting higher profits, 47% credited sales volumes, 20% cited usual seasonal change, and 16% cited higher prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs met and 62% said they were not interested in a loan. A net 6% 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 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 October 2022.

LABOR MARKETS

Forty-six percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from September. Forty percent have openings for skilled workers (down 2 points) and 22 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the transportation, construction, and manufacturing sectors. Openings are lowest in the finance and agriculture sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 20 percent planning to create new jobs in the next three months (down 3 points). Fifty-five percent (90 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 percent of owners reported few qualified applicants for their open positions (up 3 points) and 25 percent reported none (down 5 points from September’s 49-year record high).

CAPITAL SPENDING

Fifty-four percent reported capital outlays in the last six months, down 2 points from September. Of those making expenditures, 37 percent reported spending on new equipment (down 3 points), 22 percent acquired vehicles (unchanged), and 17 percent improved or expanded facilities (up 1 point). Eleven percent spent money for new fixtures and furniture (up 2 points) and 6 percent acquired new buildings or land for expansion (unchanged). Twenty-three percent plan capital outlays in the next few months, down 1 point from September. Investment is needed to address labor supply chain problems in the current environment. In addition, Federal Reserve actions will continue to raise interest rates, increasing the cost of financing capital projects and reducing the expected gains from investments.

INFLATION

The net percent of owners raising average selling prices decreased 1 point from September to a net 50 percent seasonally adjusted. Unadjusted, 8 percent (down 1 point) reported lower average selling prices and 56 percent (down 3 points) reported higher average prices. Price hikes were most frequent in retail (69 percent higher, 6 percent lower), wholesale (64 percent higher, 12 percent lower), construction (61 percent higher, 5 percent lower), and services (54 percent higher, 5 percent lower). Seasonally adjusted, a net 34 percent plan price hikes (up 3 points).

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-six percent reported all credit needs met (unchanged) and 62 percent said they were not interested in a loan (unchanged). A net 6 percent reported their last loan was harder to get than in previous attempts (up 1 point). One percent reported that financing was their top business problem (unchanged). A net 22 percent of owners reported paying a higher rate on their most recent loan, unchanged from September. The average rate paid on short maturity loans was 6.7 percent. Twenty-eight percent of all owners reported borrowing on a regular basis (up 2 points).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 44 percent reported raising compensation, down 1 point from September. A net 32 percent plan to raise compensation in the next three months, up 9 points from September and the highest since October 2021. Ten percent cited labor costs as their top business problem, unchanged from September, and 23 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 30 percent, up 1 point from September. Among owners reporting lower profits, 34 percent blamed the rise in the cost of materials, 22 percent blamed weaker sales, 12 percent cited labor costs, 12 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, 47 percent credited sales volumes, 20 percent cited usual seasonal change, and 16 percent cited higher prices (which produce higher sales volumes).

SALES AND INVENTORIES

A net negative 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 3 points from September. The net percent of owners expecting higher real sales volumes declined by 3 points to a net negative 13 percent. The net percent of owners reporting inventory increases improved 1 point to a negative 1 percent. Not seasonally adjusted, 16 percent reported increases in stocks and 16 percent reported reductions. Thirty-one percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 31 percent report a moderate impact and 27 percent report a mild impact. Only 10 percent report no impact from recent supply chain disruptions. A net zero percent of owners viewed current inventory stocks as “too low” in October, down 1 point from September. A net 2 percent of owners plan inventory investment in the coming months.

COMMENTARY

Real GDP grew in the third quarter by 2.6%. Exports grew significantly, adding 2.8 points to growth (so everything else was slightly negative in total). For the year, with two negative quarters in the first half, the economy is about even, no real growth. Consumer spending has been stubbornly solid thanks to widely held savings deposits and credit. But these sources of spending support will soon lose strength. Then, only job and income growth will keep spending up. Housing has been hard hit by mortgage rates over 7%, starts have tumbled and existing home sales plunged. Rates can rise further as

The frequency of reported price increases was highest in the retail trades, 69%, followed by 64% in wholesale, and 61% in construction. The other industry groups averaged about 50% raising prices, with the exception of professional services at 20%. Clearly, consumers are being confronted with inflation in every aspect of their lives. So far, inflation has been resistant to the impact of higher interest rates. If the Fed were a “fiscal” arm of government, it could just raise taxes on everyone for a short period of time to slow spending. But it can’t and must rely on the tenuous link between interest rates and spending. Major expenditures by consumers can be impacted (cars, houses, boats, etc.), a slow, erratic process. Firms are more directly impacted as the cost of loans (capital) rises, making more and more investment outlays unprofitable and thus impacting employment and income in affected sectors.

Firms can quickly cut their prices but have little or no control over things like labor compensation or gas prices. The Fed wants inflation to fall to 2%, but that is still inflation. Prices have risen significantly. Will they fall or just stop rising as fast? If they fall, the purchasing power of wage gains will increase for workers. If prices don’t fall, workers have sustained a permanent reduction in their incomes and wealth (savings accounts, 401k values, etc.). It’s the “inflation tax”.

While the Administration keeps pushing for more spending (inflationary) the Fed will persist in doing its best to slow spending (hopefully avoiding a real recession). Success for the Fed is bad news for small businesses, sales will fall, costs will be sticky, so profits will take a hit. Rough times ahead.

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