A key gauge of small business optimism sank to the worst levels since the onset of the pandemic in March, data out Tuesday showed.
At 93.2, the NFIB’s gauge missed estimates and dropped to the lowest since April of 2020 (figure below). The range of guesses (because that’s what they are, guesses) from 17 economists was 92 to 99.5.
Not surprisingly, one problem was inflation. In fact, inflation is the problem now. Nearly a third of owners identified inflation as the single most important issue, up from the prior month and the highest in 41 years. Inflation has now dethroned quality of labor as the most vexing problem for America’s small businesses.
NFIB Chief Economist Bill Dunkelberg was blunt. “With inflation, an ongoing staffing shortage and supply chain disruptions, small business owners remain pessimistic about their future business conditions.”
As a reminder, small businesses account for nearly half of all private sector employment in the US.
Two simple statistics told the story. The net percentage of owners expecting business conditions to improve over the next six months fell 14 points in March, to negative 49%. That was the lowest ever in 48 years of survey data (figure below).
At the same time, a net 72% of owners reported raising their average selling price. That was the highest reading in the survey’s history. In wholesale, no one reported lower prices.
Although the net percentage who reported higher comp ticked lower, the drop still left 49% raising pay, just one point from January’s all-time high. Just 8% reported no impact from supply chain disruptions and 35% identified rising materials costs when explaining lower profits.
I’d reiterate that small businesses aren’t able to cope as well with margin headwinds (including higher labor costs) as large corporates. Remember: S&P 500 margins are loitering near record highs. The fact is, giant multinationals’ capacity to protect the bottom line in the face of sundry threats may as well be unlimited compared to small businesses, which are often described as the “lifeblood” of the world’s largest economy.
One of the biggest concerns during the early days of the pandemic was that small businesses would simply cease to exist, a terrifying prospect that prompted Congress to launch a rescue program that some criticized as a magnet for fraud. Haphazard though it may have been, it was a necessary backstop.
Exactly two years later, small businesses are feeling nearly as bad about things as they were at the depths of the crisis.
