July 2023 Report: Small Business Owners Continue to Manage Challenging Economic Environment in July

August 9, 2023

The NFIB Small Business Optimism Index increased 0.9 of a point in July to 91.9, marking the 19th consecutive month below the 49-year average of 98. Twenty-one percent of owners reported that inflation was their single most important problem in operating their business, down three points from June.

Key findings include:

Owners expecting better business conditions over the next six months improved 10 points from June to a net negative 30%, 31 percentage points better than last June’s reading of a net negative 61%. This is the highest reading since August 2021 but historically very negative.
Forty-two percent of owners reported job openings that were hard to fill, unchanged from June but remaining historically very high.
The net percent of owners raising average selling prices decreased four points to a net 25% seasonally adjusted, still a very inflationary level but trending down. This is the lowest reading since January 2021.
The net percent of owners who expect real sales to be higher improved two points from June to a net negative 12%, a very pessimistic perspective.

As reported in NFIB’s monthly jobs report, 61% of owners reported hiring or trying to hire in July, up two points from June. Of those hiring or trying to hire, 92% of owners reported few or no qualified applicants for the positions they were trying to fill. Thirty-three percent of owners reported few qualified applicants for their open positions and 23% reported none.

Fifty-five percent of owners reported capital outlays in the last six months, up two points from June. Of those making expenditures, 38% reported spending on new equipment, 22% acquired vehicles, and 15% improved or expanded facilities. Eleven percent spent money on new fixtures and furniture and 6% acquired new buildings or land for expansion. Twenty-seven percent of owners plan capital outlays in the next few months.

A net negative 13% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down three points from June and the lowest reading since August 2020. The net percent of owners expecting higher real sales volumes improved two points to a net negative 12%.

The net percent of owners reporting inventory gains was unchanged at a net negative 3%. Not seasonally adjusted, 14% reported increases in stocks and 14% reported reductions. A net negative 4% of owners viewed current inventory stocks as “too low” in July. By industry, shortages are reported most frequently in retail (15%), transportation (14%), manufacturing (11%), and services (9%). Shortages in construction (6%) have been reduced. A net negative 2% of owners plan inventory investment in the coming months, up one point.

Falling four points from June, the net percent of owners raising average selling prices dropped to a net 25% (seasonally adjusted), the lowest since January 2021. Twenty-one percent of owners reported that inflation was their single most important problem in operating their business. Unadjusted, 14% reported lower average selling prices and 40% reported higher average prices. Price hikes were the most frequent in finance (53% higher, 13% lower), retail (52% higher, 10% lower), wholesale (44% higher, 15% lower), and construction (43% higher, 6% lower). Seasonally adjusted, a net 27% plan price hikes.

Seasonally adjusted, a net 38% reported raising compensation. A net 21% plan to raise compensation in the next three months, down one point from June. Ten percent of owners cited labor costs as their top business problem, up two points. Twenty-three percent of owners said that labor quality was their top business problem.

The frequency of reports of positive profit trends was a net negative 30%, down six points from June. Among owners reporting lower profits, 30% blamed weaker sales, 19% blamed the rise in the cost of materials, 18% cited labor costs, 9% cited lower prices, 5% cited usual seasonal change, and 4% cited higher taxes or regulatory costs. For owners reporting higher profits, 44% credited sales volumes, 34% cited usual seasonal change, and 9% cited higher selling prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-five percent reported all credit needs were 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. Four percent reported that financing was their top business problem. A net 23% of owners reported paying a higher rate on their most recent loan. To date, Fed policies raising interest rates and reducing their portfolio have not had a significant impact on small firms.

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 July 2023.

LABOR MARKETS

Forty-two percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from June. Thirty-six percent have openings for skilled workers (up 1 point) and 18 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction, manufacturing, and transportation sectors where compensation gains are more frequently reported. Openings are lowest in the professional 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, up 2 points from June but 15 points below its record high reading of 32 percent reached in August 2021. Overall, 61 percent reported hiring or trying to hire in July, up 2 points from June. Fifty-six 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). Thirtythree percent of owners reported few qualified applicants for their open positions (unchanged) and 23 percent reported none (up 2 points). Labor quality is the most frequently identified business problem (23 percent), edging out inflation for the top spot.

CAPITAL SPENDING

Fifty-five percent reported capital outlays in the last six months, up 2 points from June. Of those making expenditures, 38 percent reported spending on new equipment (up 1 point), 22 percent acquired vehicles (up 1 point), and 15 percent improved or expanded facilities (up 1 point). Eleven percent spent money on new fixtures and furniture (up 3 points) and 6 percent acquired new buildings or land for expansion (unchanged). Twenty-seven percent plan capital outlays in the next few months, up 2 points from June.

INFLATION

The net percent of owners raising average selling prices decreased 4 points from June to a net 25 percent seasonally adjusted, the lowest since January 2021. Twenty-one percent of owners reported that inflation was their single most important problem in operating their business, down 3 points from last month and 13 points lower than last July’s highest reading since 1979 Q4. July’s reading was the lowest since November 2021. Unadjusted, 14 percent (up 2 points) reported lower average selling prices and 40 percent (down 3 points) reported higher average prices. Seasonally adjusted, a net 27 percent plan price hikes (down 4 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 (down 2 points) and 62 percent said they were not interested in a loan (up 2 points). A net 6 percent reported their last loan was harder to get than in previous attempts (unchanged). Four percent reported that financing was their top business problem (up 2 points). A net 23 percent of owners reported paying a higher rate on their most recent loan, down 1 point from June. The average rate paid on short maturity loans was 8.5 percent, 0.7 of a percentage point below June’s highest reading since June 2007. Twenty-seven percent of all owners reported borrowing on a regular basis (down 1 point).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 38 percent reported raising compensation, up 2 points from June. A net 21 percent plan to raise compensation in the next three months, down 1 point from June. Ten percent cited labor costs as their top business problem, up 2 points from June. Twenty-three percent said that labor quality was their top business problem (down 1 point). The frequency of reports of positive profit trends was a net negative 30 percent, down 6 points from June. Among owners reporting lower profits, 30 percent blamed weaker sales, 19 percent blamed the rise in the cost of materials, 18 percent cited labor costs, 9 percent cited lower prices, 5 percent cited the usual seasonal change, and 4 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 44 percent credited sales volumes, 34 percent cited usual seasonal change, and 9 percent cited higher selling prices.

SALES AND INVENTORIES

A net negative 13 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 3 points from June. This was the lowest reading since August 2020. The net percent of owners expecting higher real sales volumes improved 2 points to a net negative 12 percent. The net percent of owners reporting inventory gains was unchanged at a net negative 3 percent. Not seasonally adjusted, 14 percent reported increases in stocks (unchanged) and 14 percent reported reductions (up 1 point). A net negative 4 percent of owners viewed current inventory stocks as “too low” in July, unchanged from June. By industry, shortages are reported most frequently in retail (15 percent), transportation (14 percent), manufacturing (11 percent), and services (9 percent). Shortages in construction (6 percent) have been reduced because home sales have slowed dramatically due to higher interest rates. A net negative 2 percent of owners plan inventory investment in the coming months, up 1 point from June.

COMMENTARY

Waiting for Gadot: The long anticipated, predicted, recession is nowhere to be seen (almost). Recessions can start quickly (2020 shutdown) and end quickly (2020 reopening). Or they can start slowly, for example, due to opposing forces like expansionary fiscal policy vs. contractionary monetary policy. The Fed staff (not FOMC) has changed their recession forecast to a “slowdown.” There is more talk about a “soft landing” and less of a recession. The shifting outlook is often confusing but even less clear, is can the Fed reach its 2% inflation target (PCE deflator) without a significant slowdown in economic activity (e.g., slower wage cost growth)? The manufacturing sector is clearly slowing, soft all year (ISM) but services are doing well (ISM). Business investment is solid (lots of government incentives), and housing is ignoring 7% mortgage rates.

The labor market seems to be the driving force on the growth side. The last jobs report was solid, but most of the jobs created were in the public sector, not due to private sector growth. So public sector employment grew, but producing what? What, for example, will 50,000 new IRS workers add to GDP other than their government (taxpayer financed) wages? Those wages are spent, providing support for consumer spending, which was the driving force behind second quarter growth. But what was produced for us to buy? Forty-seven percent of the growth in GDP came from business investment in plants and equipment, residential construction, and inventories, matching the contribution of consumers. Nineteen percent was produced by government purchases (like defense). The trade deficit subtracted 11% (GDP measures income and output produced domestically, exports a + but imports a -). Outlays like Social Security payments are transfers of money from one person (taxpayer) to another (consumer) and don’t count. A large chunk of the investment growth was funded by government subsidies (e.g., Chips Act, EV subsidies) and huge cost of living adjustments supported consumers, not strong private sector performance.

Some consumers (the older ones) received big income increases from government indexing, over 8 percent. However, millions of consumers will soon start repaying student loans rather than spending the money on goods and services. Small firms are already experiencing weakening sales (20% higher, 27% lower) and are still trying to manage cost increases (e.g., higher wages, increased regulations, etc.). The credit rating of US debt was downgraded by Fitch. The cost of servicing the U.S. debt is rising rapidly as newly issued debt with higher interest rates replaces old expiring bonds, nearing $1 trillion annually. This will crowd out other government spending (like defense). Add the political uncertainty and small businesses, especially new ones, face an exceptionally challenging environment over the next two years.

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