January 2023 Report: Inflation Eases Slightly on Main Street but Remains Top Business Problem
The NFIB Small Business Optimism Index increased 0.5 points in January to 90.3, remaining below the 49-year average of 98. Down six points from last month, 26% of owners reported inflation was their single most important problem in operating their business. Owners expecting better business conditions over the next six months improved six points from December to a net negative 45%.
Key findings include:
- Forty-five percent of owners reported job openings that were hard to fill, up four points from December, remaining historically very high.
- The net percent of owners raising average selling prices decreased one point to a net 42% seasonally adjusted, too high for 2% target.
- The net percent of owners who expect real sales to be higher worsened four points from December to a net negative 14%.
As reported in NFIB’s monthly jobs report, 57% of owners reported hiring or trying to hire in January. Of those hiring or trying to hire, 91% of owners reported few or no qualified applicants for the positions they were trying to fill.
Fifty-nine percent of owners reported capital outlays in the last six months, up four points from December, a positive development. Of those making expenditures, 42% reported spending on new equipment, 24% acquired vehicles, and 11% spent money for new fixtures and furniture. Fourteen percent improved or expanded facilities and 8% acquired new buildings or land for expansion. Twenty-one percent of owners plan capital outlays in the next few months.
A net negative 4% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, four points better than December but still negative. The net percent of owners expecting higher real sales volumes deteriorated four points to a net negative 14%. Overall, a weak set of sales conditions.
The net percent of owners reporting inventory increases rose six points to a net 6%. Accumulation is starting now that supply problems are being resolved and consumer spending has eased. Not seasonally adjusted, 17% reported increases in stocks and 17% reported reductions. Twenty-five percent of owners recently reported that supply chain disruptions have had a significant impact on their business.
A net negative 1% of owners viewed current inventory stocks as “too low” in January, down two points from December. By industry, shortages are reported most frequently in wholesale (14%), retail (13%), manufacturing (11%), and finance (10%). A net negative 8% of owners plan inventory investment in the coming months, four points weaker than December, foreshadowing a reduction in orders for new stocks.
The net percent of owners raising average selling prices decreased one point from December to a net 42% seasonally adjusted, the lowest since May 2021 but far too high to be consistent with 2% inflation, the Fed’s goal. Unadjusted, 10% reported lower average selling prices and 51% reported higher average prices. Price hikes were the most frequent in construction (62% higher, 4% lower), retail (60% higher, 9% lower), wholesale (58% higher, 8% lower), and transportation (53% higher, 10% lower). Seasonally adjusted, a net 29% plan price hikes.
Seasonally adjusted, a net 46% of owners reported raising compensation. While other input costs are falling labor costs are resisting. A net 22% plan to raise compensation in the next three months, down five points from December. Ten percent of owners cited labor costs as their top business problem and 24% said that labor quality was their top business problem.
The frequency of reports of positive profit trends was a net negative 26%, four points better than December. Among owners reporting lower profits, 27% blamed weaker sales, 26% blamed the rise in the cost of materials, 15% cited the usual seasonal change, 11% cited labor costs, 10% cited lower profits, and 2% cited higher taxes or regulatory costs. For owners reporting higher profits, 53% credited sales volumes, 23% cited usual seasonal change, 11% 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 60% percent said they were not interested in a loan. Loan interest rates have started to rise sharply in response to Fed policy changes.
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 January 2023.
LABOR MARKETS
Forty-five percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 4 points from December. Thirty-six percent have openings for skilled workers (up 1 point) and 17 percent have openings for unskilled labor (up 1 point). The difficulty in filling open positions is particularly acute in the construction, transportation, and manufacturing sectors. Openings are lowest in the agriculture and finance sectors. Owners’ plans to add positions remain elevated, with a seasonally adjusted net 19 percent planning to create new jobs in the next three months, up 2 points from December and 13 points below its record high reading of 32 reached in August 2021. Overall, 57 percent reported hiring or trying to hire in January, up 2 points from December. Fifty-two percent (91 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 1 point). Twenty seven percent of owners reported few qualified applicants for their open positions (up 1 point) and 25 percent reported none (unchanged).
CAPITAL SPENDING
Fifty-nine percent reported capital outlays in the last six months, up 4 points from December. Of those making expenditures, 42 percent reported spending on new equipment (up 5 points), 24 percent acquired vehicles (up 2 points), and 11 percent spent money for new fixtures and furniture (down 1 point). Fourteen percent improved or expanded facilities (up 3 points) and 8 percent acquired new buildings or land for expansion (up 4 points). Twenty-one percent plan capital outlays in the next few months, down 2 points from December.
INFLATION
The net percent of owners raising average selling prices decreased 1 point from December to a net 42 percent seasonally adjusted, the lowest since May 2021. Unadjusted, 10 percent (down 2 points) reported lower average selling prices and 51 percent (unchanged) reported higher average prices. Price hikes were most frequent in construction (62 percent higher, 4 percent lower), retail (60 percent higher, 9 percent lower), wholesale (58 percent higher, 8 percent lower), and transportation (53 percent higher, 10 percent lower). Seasonally adjusted, a net 29 percent plan price hikes (up 5 points).
CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-five percent reported all credit needs met (up 3 points) and 62 percent said they were not interested in a loan (unchanged). A net 7 percent reported their last loan was harder to get than in previous attempts (up 2 points). Three percent reported that financing was their top business problem (unchanged and the highest since December 2018). A net 23 percent of owners reported paying a higher rate on their most recent loan, unchanged from November. The average rate paid on short maturity loans was 7.7 percent, only 0.2 percent below last month’s highest level since March 2008. Twenty-eight percent of all owners reported borrowing on a regular basis (up 1 point).
COMPENSATION AND EARNINGS
Seasonally adjusted, a net 46 percent reported raising compensation, up 2 points from December. A net 22 percent plan to raise compensation in the next three months, down 5 points from December. Ten percent cited labor costs as their top business problem, up 2 points from December, and 24 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 26 percent. Among owners reporting lower profits, 27 percent blamed weaker sales, 26 percent blamed the rise in the cost of materials, 15 percent cited the usual seasonal change, 11 percent cited labor costs, 10 percent cited lower prices, and 2 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 53 percent credited sales volumes, 23 percent cited usual seasonal change, and 11 percent cited higher prices (which produce higher sales volumes).
SALES AND INVENTORIES
A net negative 4 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 4 points from December. The net percent of owners expecting higher real sales volumes deteriorated 4 points to a net negative 14 percent. The net percent of owners reporting inventory increases rose 6 points to a net 6 percent. Not seasonally adjusted, 17 percent reported increases in stocks and 17 percent reported reductions. Twenty-five percent of owners recently reported that supply chain disruptions have had a significant impact on their business. Another 32 percent reported a moderate impact and 29 percent reported a mild impact. A net negative 1 percent of owners viewed current inventory stocks as “too low” in January, down 2 points from December. A net negative 8 percent of owners plan inventory investment in the coming months.
COMMENTARY
Count small business owners among the crowd predicting a recession this year. The net percent expecting worsening business condition in the coming months cratered at a net negative 61 percent in June last year. Then, only 5 percent expected better, 41 percent expected worse and 27 percent expected much worse. January’s reading of a net negative 45 percent is certainly better, but still a terrible reading. Only 9 percent said better, 37 percent said worse and 10 percent much worse. Historically, extreme negative readings like this have been followed by a recession (see chart).
The Index of Small Business Optimism has been in recession territory all last year and into 2023. If it weren’t for the Job Openings and Hiring Plans components, the Index would be much lower. Actual capital spending and inventory investment are very weak as are plans to spend. Earnings are dismal. Actual sales trends are negative and expected real sales are also. When we ask owners if they have any job openings they reply “yes, I’d hire more if I could,” so hiring plans are historically high as is the level of job openings. Everything else is pretty much in the tank. When we ask owners if they were successful in hiring and filling open positions, the answer is “no,” more firms reported reducing employment than increasing it and the average addition of workers is smaller than the reported reduction. These openings and hiring plans roll over from month to month.
So the economy is not likely to grow much if at all in 2023. The statisticians say we have many more jobs, but firms aren’t noticing it, they’re still looking for applicants. The Fed will continue to reduce its portfolio of bonds and will raise its policy rate 25 basis points at the next meeting, then mull over the data on the economy and the inflation numbers. The debt ceiling debate will create a lot of noise, but the U.S. will not trigger a default of any serious level (if at all). The concern is that inflation may get “stuck” at too high a level, mostly due to the difficulty in lowering labor costs. Lots of challenges for the Fed.
Bill Dunkelberg is Chief Economist at the National Federation of Independent Business (NFIB)
