Inflation continued to weaken small business sentiment in December
|Summary
Elevated Prices and Slowing Demand Weigh on Earnings and Optimism
The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 2.1 points to 89.8 in December, a steeper decline than expected. December marks a full year of the index coming in below its long-term average of 98.
Eight of the index's ten components fell in December. The wide-ranging fall in components helped erase the index's surprise gain in November.
In what can be interpreted as good news for the path of inflation, the net percentage of small businesses raising their prices declined eight percentage points in November to 43%, the lowest level since May 2021. The net percentage of firms planning to raise prices over the next three months also dropped 10 percentage points to 24%.
Despite signs of price pressures easing, inflation continues to be the single most important problem facing small businesses. Among respondents, 32% reported that inflation was their top concern, a two point increase from November.
A net 44 percent of firms reported raising compensation. While the net percentage of businesses increasing compensation has fallen from its peak of 50% in January 2022, this percentage remains at nearly double its long-term average of 23%. Similarly, 41% of owners reported having job openings that were hard to fill, a decrease from November (44%) but sill elevated far above pre-pandemic levels. Labor quality remains the second highest concern for businesses.
That noted, demand for labor appears to be softening. Fifty-five percent of small business owners reported hiring or trying to hire in December, down four percentage points from November. A net 17% of owners planned on creating jobs in the next three months, down 1 point from November and 15 points lower than the record 32% reached in August 2021.
Yet, high prices still appear to be weighing on demand. A net 8% of small businesses reported lower sales in the last three months compared to the three months prior, and a net 10% expected to sell lower volumes in the three months ahead.
The net percent of businesses reporting inventory is too low rose three percentage points to a net 1% and the net percent of businesses planning to increase inventories was unchanged at -4%.
High input costs and waning demand are taking a bite out of earnings. On net, 30% of owners reported lower earnings over the last three months compared to the prior three months, up eight points from 22% in November. Among those reporting lower earnings, 30% identified the rise in material costs as the primary factor and 24% attributed it to weaker sales.
As the Federal Reserve continues to raise interest rates to fight inflation, small business owners are reporting worsening credit conditions. A net 7% of owners reported that their last loan was harder to get than previous attempts, a 2 point increase from last month. This percentage is the highest since September 2014.
Consequently, business owners grew more pessimistic on the outlook in December. A net negative 51% of small business owners expect business conditions to improve over the next six months, eight percentage points lower than the prior month.
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