Small Firms Haven’t Been This Worried About Inflation Since 1979

Small businesses have scarcely ever been this worried about inflation.

37% of owners who participated in the NFIB’s monthly survey said inflation was their single-most important problem, up from June and the highest since Q4 1979.

The headline optimism index ticked marginally higher, but at 89.9, remained below the five-decade average for a sixth consecutive month (figure below).

The NFIB’s gauge probably doesn’t get as much press as it should, although analysts do generally accord it some respect. Small businesses are, after all, the “lifeblood” of the domestic economy.

Under the proverbial hood, July’s vintage was a predictable compendium of angst tied to a distorted labor market and the onerous realities of operating in a high-inflation environment.

Nearly half of owners said they had job openings they couldn’t fill. On a seasonally adjusted basis, a net negative 5% of all owners reported higher nominal sales in the past three months, but the net percentage who expect higher real sales volumes ticked lower, to a net negative 29%. That, the NFIB noted, was the second weakest quarterly measure ever.

Supply chains are still an issue. Just 9% of businesses said they weren’t impacted.

On the bright side (maybe) the net percentage of owners raising average selling prices fell to a net 56% on a seasonally adjusted basis. The report described that drop as “significant” but cautioned that it nevertheless points to inflation. The percentage of firms who expect to raise prices dove 12 points in July to a net 37%.

Price hikes and price hike intentions are in part a function of perceived demand. So, to the extent price hikes recede and it’s a function of lower input costs or any other factor that suggests firms’ own costs are leveling off, that’s unequivocally good news. On the other hand, if businesses aren’t raising prices to consumers because demand is faltering or they feel like they can’t because the consumer is hamstrung by high inflation for necessities, that’s unequivocally bad news.

Relatedly, if businesses can’t raise prices when they need to (and I’m not necessarily suggesting that’s the case here, but it’s certainly a question owners are grappling with as inflation erodes real earnings and the economy decelerates), margins will suffer. Unlike corporate America, which came into 2022 boasting of record profitability, some small businesses don’t have the same kind of pricing power — their margin for error is lower, if you’ll forgive the bad pun.

Apropos, the frequency of positive profit trends was a net negative 26% in the NFIB poll, and within firms reporting lower profits, the percentage blaming weaker sales was far higher than the percentage citing higher labor costs. Overwhelmingly, firms pointed to rising input costs as the culprit.

The expectations gauge, which grabbed scattered headlines over the past several months after careening to a record low, moved higher, with the caveat that “higher” is something of a misnomer. At a net negative 52%, it’s still near all-time lows (figure below).

“The uncertainty in the small business sector is climbing again as owners continue to manage historic inflation, labor shortages and supply chain disruptions,” Bill Dunkelberg, NFIB Chief Economist, said Tuesday.

I’ll repeat some language I employed last month. I doubt the existential sense of dread is comparable to that felt during the early days of COVID when, for a time, some wondered if the smallest American businesses might simply cease to exist. Government lifelines helped, though, and it’s important to remember that not every “small” business is a family-owned bar. (We should be so lucky.) Many of these firms are serious enterprises for whom the combination of soaring inflation and scarce labor is an existential problem all its own.

As Dunkelberg went on to say, “owners will continue to manage their businesses into a very uncertain future.”