September 2023 Report: Small Business Optimism Dips in September as Inflation Remains Top Problem

October 23, 2023

The NFIB Small Business Optimism Index decreased half of a point in September to 90.8. September’s reading marks the 21st consecutive month below the 49-year average of 98. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, unchanged from last month and tied with labor quality as the top concern.

Key findings include:

Small business owners expecting better business conditions over the next six months deteriorated six points from August to a net negative 43% seasonally adjusted, however, 18 percentage points better than last June’s reading of net negative 61% and definitely at recession levels.
Forty-three percent (seasonally adjusted) of owners reported job openings that were hard to fill, up three points from August and remaining historically high as owners can’t hire enough workers due to few qualified applicants.
Seasonally adjusted, a net 23% plan to raise compensation in the next three months, down three points from August.
The net percent of owners raising average selling prices increased two points to a net 29% seasonally adjusted, still a very inflationary level.
The net percent of owners who expect real sales to be higher increased one point from August to a net negative 13% (seasonally adjusted), still a very dismal posture.

As reported in NFIB’s monthly jobs report, 43% (seasonally adjusted) of all small business owners reported job openings they could not fill in the current period, up three points from August. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18% planning to create new jobs in the next three months.

Fifty-seven percent of owners reported capital outlays in the last six months. Of those making expenditures, 41% reported spending on new equipment, 22% acquired vehicles, and 17% improved or expanded facilities. Twelve percent of owners spent money on new fixtures and furniture and 7% acquired new buildings or land for expansion. Twenty-four percent of owners 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, up six points from August’s lowest reading since August 2020. The net percent of owners expecting higher real sales volumes improved one point to a net negative 13%.

The net percent of owners reporting inventory gains improved four points to a net negative 3%. Not seasonally adjusted, 13% reported increases in stocks and 15% reported reductions. A net negative 4% of owners viewed current inventory stocks as “too low” in September, so more now have surplus stocks. By industry, shortages are reported most frequently in the transportation (15%), construction (9%), retail (9%), and services (8%) sectors. A net negative 1% of owners plan inventory investment in the coming months, down one point from August. Not much inventory investment.

The net percent of owners raising average selling prices increased two points from August to a net 29% seasonally adjusted. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, unchanged from last month and tied with labor quality as the top problem.

Unadjusted, 13% of owners reported lower average selling prices and 41% reported higher average prices. Price hikes were the most frequent in finance due to rising interest rates (75% higher, 3% lower), construction (53% higher, 6% lower), retail (49% higher, 11% lower), services (33% higher, 12% lower), and wholesale (33% higher, 10% lower). Seasonally adjusted, a net 30% plan price hikes.

Seasonally adjusted, a net 36% reported raising compensation in September. A seasonally adjusted net 23% plan to raise compensation in the next three months, down three points from August. Nine percent of owners cited labor costs as their top business problem, up one point from August. Twenty-three percent said that labor quality was their top business problem, down one point.

The frequency of reports of positive profit trends was a net negative 24%, up one point from August. Among owners reporting lower profits, 29% blamed weaker sales, 20% blamed the rise in the cost of materials, 15% cited labor costs, 8% cited lower prices, 7% cited the usual seasonal change, and 6% cited higher taxes or regulatory costs. For owners reporting higher profits, 55% credited sales volumes, 22% cited usual seasonal change, and 9% cited higher selling prices.

Two percent of owners reported that all their borrowing needs were not satisfied. Twenty-three percent reported all credit needs met and 65% said they were not interested in a loan. A net 8% reported that their last loan was harder to get than in previous attempts.

Four percent of owners reported that financing was their top business problem. A net 26% 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 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 September 2023.

LABOR MARKETS

Forty-three percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 3 points from August. Thirty-seven percent have openings for skilled workers (up 2 points) and 18 percent have openings for unskilled labor (unchanged). The difficulty in filling open positions is particularly acute in the construction, retail, manufacturing, and services sectors. Openings are lowest in the professional services and finance sectors. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18 percent planning to create new jobs in the next three months, up 1 point from August and 14 points below its record high reading of 32 percent reached in August 2021. Overall, 61 percent reported hiring or trying to hire in September, down 2 points from August. Fifty-seven percent (93 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 3 points). Thirty percent of owners reported few qualified applicants for their open positions (down 3 points) and 27 percent reported none (up 6 points).

CAPITAL SPENDING

Fifty-seven percent reported capital outlays in the last six months, up 1 point from August. Of those making expenditures, 41 percent reported spending on new equipment (up 3 points), 22 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (unchanged). Twelve percent spent money on new fixtures and furniture (up 1 point) and 7 percent acquired new buildings or land for expansion (up 3 points). Twenty-four percent plan capital outlays in the next few months, unchanged from August. A more positive view of the future economy and economic policy would help stimulate longer term investment spending, but currently, owners’ views about the future are not supportive and financing costs are very high. Investment is needed to address labor supply chain problems which still persist in the current environment.

INFLATION

The net percent of owners raising average selling prices increased 2 points from August to a net 29 percent seasonally adjusted. Twentythree percent of owners reported that inflation was their single most important problem in operating their business, unchanged from last month and tied with labor quality as the top problem. Unadjusted, 13 percent (up 1 point) reported lower average selling prices and 41 percent (up 3 points) reported higher average prices. Price hikes were most frequent in finance (75 percent higher, 3 percent lower, as interest rates rise), construction (53 percent higher, 6 percent lower), retail (49 percent higher, 11 percent lower), services (33 percent higher, 12 percent lower), and wholesale (33 percent higher, 10 percent lower). Seasonally adjusted, a net 30 percent plan price hikes (unchanged).

CREDIT MARKETS

Two percent of owners reported that all their borrowing needs were not satisfied (unchanged). Twenty-three percent reported all credit needs met (down 4 points) and 65 percent said they were not interested in a loan (up 6 points). A net 8 percent reported their last loan was harder to get than in previous attempts (up 4 points). Four percent reported that financing was their top business problem (up 2 points). A net 26 percent of owners reported paying a higher rate on their most recent loan, up 2 points from August. The average rate paid on short maturity loans was 9.8 percent, 0.8 of a percentage point above last month. Thirty-one percent of all owners reported borrowing on a regular basis (up 3 points).

COMPENSATION AND EARNINGS

Seasonally adjusted, a net 36 percent reported raising compensation, unchanged from August. A seasonally adjusted net 23 percent plan to raise compensation in the next three months, down 3 points from August. Nine percent cited labor costs as their top business problem, up 1 point from August. 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 24 percent, up 1 point from August. Among owners reporting lower profits, 29 percent blamed weaker sales, 20 percent blamed the rise in the cost of materials, 15 percent cited labor costs, 8 percent cited lower prices, 7 percent cited the usual seasonal change, and 6 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 55 percent credited sales volumes, 22 percent cited usual seasonal change, and 9 percent cited higher selling prices.

SALES AND INVENTORIES

A net negative 8 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 6 points from August’s lowest reading since August 2020. The net percent of owners expecting higher real sales volumes improved 1 point to a net negative 13 percent. The net percent of owners reporting inventory gains improved 4 points to a net negative 3 percent. Not seasonally adjusted, 13 percent reported increases in stocks (up 2 points) and 15 percent reported reductions (down 1 point). A net negative 4 percent of owners viewed current inventory stocks as “too low” in September, up 1 point from August. By industry, shortages are reported most frequently in the transportation (15 percent), construction (9 percent), retail (9 percent), and services (8 percent) sectors. A net negative 1 percent of owners plan inventory investment in the coming months, down 1 point from August.

COMMENTARY

The third quarter came in better than expected, likely growing GDP over 2%. Investment in plants and equipment stayed strong, buoyed by subsidies from the Inflation Reduction Act. Consumers managed a decent showing, drawing down their savings and flashing their credit cards. And housing held up in spite of rising mortgage rates. The long-anticipated recession (predicted by our traditional leading indicators) has not shown its face yet in the statistics (unemployment remains low). The NFIB Index of Small Business Optimism has been a reliable indicator of recessions since 1973 and it too has signaled a recession for over a year. The economy is skating on thin ice, cracks have appeared, but there has been no significant crash through the ice.

Politics will likely be a major determinant of how this works out. Of $6.8 trillion in projected federal outlays in fiscal 2024, only $1.9 trillion is available for reductions sought by those blaming excessive government spending for inflation. The rest is driven by legal obligations such as Social Security, Medicare, Medicaid etc. and interest on the debt of $750 billion and rising as the old debt is refinanced. Of the $1.9 trillion, about half is defense—a difficult category to cut. The balance of power in Congress is tenuous, making it difficult to implement any new policies while the Administration pushes its agenda forward with executive orders, unimpeded by Congressional oversight.

All of this discord is raining down on the nation’s small businesses. Inflation remains the top business problem faced by small business owners. They raised labor compensation at record rates to keep workers and fill open positions which are at record high levels. To manage rising labor, energy, and other costs, they raised prices at record high rates and continue to do so, adding to inflation pressures. But they are investing in their firms at historically low rates, primarily because capital spending is financed from the bottom line, and profits have been squeezed by rising input and labor costs and regulatory compliance. Interest rates on their loans have more than doubled and financing is harder to get now. The Administration has focused its support on big projects involving chips and electric vehicles (with some big failures like the electric bus company) while restricting the use of things like natural gas and passing regulations that allegedly will save energy but that dramatically increase the cost of appliances, cars etc. These regulations have added thousands of dollars in cost for new home construction. The small business sector is the core of our economy, where most of our non-government is sold to consumers. The government must pay more attention to supporting its health and not viewing it as a source of tax revenue and implementers of misdirected policies.

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