September 2021 Report: Small Business Optimism Slips As Labor Shortages, Inflation Impact Business Operations

October 11, 2021

The NFIB Small Business Optimism Index decreased one point in September to 99.1. Three of the 10 Index components improved, five declined, and two were unchanged.

Key findings include:

The NFIB Uncertainty Index increased five points to 74.
Owners expecting better business conditions over the next six months decreased five points to a net negative 33%.
Fifty-one percent of owners reported job openings that could not be filled, a 48-year record high for the third consecutive month.
A net 42% of owners reported raising compensation, a 48-year record high.

As reported in NFIB’s monthly jobs report, a record 51% of small business owners (seasonally adjusted) reported job openings they could not fill in the current period, up one point from August. A net 42% of owners (seasonally adjusted) reported raising compensation, up one point from August and a 48-year record high reading.

A net 30% of owners plan to raise compensation in the next three months, up four points from August’s record high reading. Twelve percent of owners cited labor costs as their top business problem and 28% said that labor quality was their top business problem – both record high readings.

Fifty-three percent of owners reported capital outlays in the next six months, down two points from August and historically a weak reading. Of those making expenditures, 37% reported spending on new equipment, 21% acquired vehicles, and 12% improved or expanded facilities. Six percent of owners acquired new buildings or land for expansion and 10% of owners spent money for new fixtures and furniture. Twenty-eight percent plan capital outlays in the next few months, down two points from August and one point below the 48-year average.

Seasonally adjusted, 3% of owners reported higher nominal sales in the past three months, up three points from August. The net percent of owners expecting higher real sales volumes improved by four points to a net 2%.

The net percent of owners reporting inventory increases rose five points to a net 3%, back into positive territory after two months of owners reporting more declines than gains. This is the highest reading since the pandemic started.

Over 35% of owners report supply chain disruptions have had a significant impact on their business. Another 32% report a moderate impact and 21% report a mild impact. Only 10% of owners report no impact from recent supply chain disruptions. A net 10% of owners viewed current inventory stocks as “too low” in September, down one point from August. A net 9% of owners plan inventory investment in the coming months, down two points from August but historically a very elevated reading.

The net percent of owners raising average selling prices decreased three points to a net 46% (seasonally adjusted). Unadjusted, 8% of owners reported lower average selling prices and 53% reported higher average prices. Price hikes were the most frequent in wholesale (75% higher, 0% lower), manufacturing (67% higher, 4% lower), and retail (71% higher, 2% lower). Seasonally adjusted, a net 46% of owners plan price hikes.

The frequency of positive profit trends increased one point to a net negative 14%. Among the owners reporting lower profits, 26% blamed the rise in the cost of materials, 23% blamed weaker sales, 19% cited labor costs, 10% cited the usual season change, 6% cited lower prices, and 6% cited higher taxes or regulatory costs. For those owners reporting higher profits, 57% credited sales volumes, 19% cited usual seasonal change, and 5% cited higher prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty percent reported all credit needs were met and 62% said they were not interested in a loan. A net 4% of owners reported their last loan was harder to get than in previous attempts. Zero percent reported that financing was their top business problem. A net 0% 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 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in September 2021.

LABOR MARKETS

Small businesses continue to struggle to find workers to fill open positions. Fifty-one percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point from August and a record high reading for the third consecutive month. The number of unfilled job openings remains far above the 48- year historical average of 22 percent. ADP data indicate that large firms are dominating the labor market, making hiring increasingly difficult for small firms. Forty-six percent have openings for skilled workers (up 2 points) and 28 percent have openings for unskilled labor (up 1 point). Sixty-seven percent of the job openings in construction are for skilled workers, up 1 point. Eighty percent of construction firms reported few or no qualified applicants (up 13 points). Overall, 67 percent reported hiring or trying to hire in September, up 1 point from August. Owners’ plans to fill open positions remain at record high levels, with a seasonally adjusted net 32 percent planning to create new jobs in the next three months, down 6 points. It’s becoming increasingly harder to hire, as shown by the continued increase in job openings, reports of higher wages, and few or no qualified applicants. Sixty-two 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 (up 2 points). Where there are open positions, labor quality remains a significant problem. Thirty-four percent of owners reported few qualified applicants for their open positions (up 3 points) and 28 percent reported none (down 1 point).

CAPITAL SPENDING

Fifty-three percent reported capital outlays in the last six months, down 2 points from August, historically weak. 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 (down 4 points), 21 percent acquired vehicles (down 1 point), and 12 percent improved or expanded facilities (down 4 points). Six percent acquired new buildings or land for expansion (unchanged) and 10 percent spent money for new fixtures and furniture (down 2 points). Twenty-eight percent plan capital outlays in the next few months, down 2 points from August and 1 point below the 48-year average.

INFLATION

The net percent of owners raising average selling prices decreased 3 points to a net 46 percent seasonally adjusted. Unadjusted, 8 percent (up 4 points) reported lower average selling prices and 53 percent (up 1 point) reported higher average prices. Price hikes were most frequent in wholesale (75 percent higher, 0 percent lower), manufacturing (67 percent higher, 4 percent lower), and retail (71 percent higher, 2 percent lower). Seasonally adjusted, a net 46 percent plan price hikes (up 2 points).

LABOR MARKETS

CAPITAL SPENDING

INFLATION

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 42 percent reported raising compensation, up 1 point from August and a 48-year record high reading. A net 30 percent plan to raise compensation in the next three months, up 4 points from August’s record high reading. Twelve percent cited labor costs as their top business problem (up 2 points) and 28 percent said that labor quality was their top business problem (unchanged), both record high readings. The frequency of reports of positive profit trends increased 1 point to a net negative 14 percent. Among owners reporting lower profits, 26 percent blamed the rise in the cost of materials, 23 percent blamed weaker sales, 19 percent cited labor costs, 10 percent cited the usual seasonal change, 6 percent cited lower prices, and 6 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 57 percent credited sales volumes, 19 percent cited usual seasonal change, and 5 percent cited higher prices.

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty percent reported all credit needs met (down 2 points) and 62 percent said they were not interested in a loan (down 1 point). A net 4 percent reported their last loan was harder to get than in previous attempts (up 1 point). Zero percent reported that financing was their top business problem (down 1 point). A net 0 percent of owners reported paying a higher rate on their most recent loan, down 2 points from August. The average rate paid on short maturity loans was 5.6 percent, up 1 point from August. Loan rates continue to be consistently low. Twenty percent of all owners reported borrowing on a regular basis (unchanged).

SALES AND INVENTORIES

Three percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 3 points from August. The net percent of owners expecting higher real sales volumes improved by 4 points to a net 2 percent, a solid reversal from the past two months. The net percent of owners reporting inventory increases rose 5 points to a net 3 percent, back into positive territory after the last two months of more owners reporting declines than gains. Over 35 percent of owners report supply chain disruptions have had a significant impact on their business. Another 32 percent report a moderate impact and 21 percent report a mild impact. Only 10 percent report no impact from recent supply chain disruptions. A net 10 percent of owners viewed current inventory stocks as “too low” in September, down 1 point from August. A net 9 percent of owners plan inventory investment in the coming months, down 2 points from August but historically a very elevated reading.

COMMENTARY

The fourth quarter is underway, but it’s going to be a rocky one. Covid continues to “rule the roost,” as the President announces proposed mandates which will make it more difficult for firms to operate. Many people are still reluctant to take a job due to Covid risks, especially those more public facing jobs such as restaurants. Supply chains are still in disarray, with ships and containers piling up on the coasts but only slowly being unloaded and distributed to businesses as truck drivers are in short supply. Inflation is running strong but the Federal Reserve is only running away. Congress still doesn’t have a budget and the debt ceiling is about to be hit.

Owners are doing their best to meet the needs of customers, but are unable to hire workers or receive needed supplies and inventories. Plans to hire and increase inventories are strong, needed to meet current demand. However plans to make capital investments are depressed as the outlook for business conditions in the future are not very positive. Owners are clearly trying to hire, but are not being very successful in spite of paying higher wages. In the meantime, inflation is squeezing profits (the major source of operating capital for small firms) so firms are raising selling prices. Just what policies Washington will follow remains uncertain, and so does the future.

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