Small business optimism is at a six-month low – how it affects Main Street and Wall Street


Key learning points

  • According to the NFIB’s Small Business Optimism Index, the outlook for small business owners has fallen to its lowest level in six months, when inflation was at a pandemic-era peak.
  • The main concern of small business owners is inflation, which affects how much they spend on materials. At the same time, profits and nominal sales have fallen, leading more small business owners to slow their price increases.
  • Other concerns for small business owners include ongoing supply chain issues, difficulty filling vacancies and finding quality talent.

Last week, the National Federation of Independent Business (NFIB) released the results of its December 2022 Small Business Optimism Index. As it turns out, small business owners aren’t very hopeful about the near future. In fact, they haven’t felt this pessimistic since June 2022, when inflation peaked at 9.1%.

This feels a bit confusing in an environment where economic indicators appear to be positive. Inflation is on a downward trend. Unemployment is low.

So why do small business owners feel pessimistic? It’s a confluence of factors that is here to help you navigate.

Inflation has come down, but it remains a problem

Annual inflation fell to 6.5% in December 2022, continuing the downward trend. While it is encouraging that things are moving in the right direction, inflation at 6.5% is still incredibly high.

Thirty-two percent of business owners in the NFIB’s survey said inflation was the number one problem hindering their business. Of the companies that reported lower profits, 30% cited higher materials costs as the main factor hurting their bottom line.

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Nominal sales have fallen in anticipation of further rate hikes

Why not just raise prices when inflation is higher? Part of the problem is that small business owners have seen a decline in sales in recent months.

Overall, the frequency of positive earnings trends dropped to 30%, which is 8% lower than in November. Among companies that have seen profit declines, revenue decline was the second most cited reason, after inflation.

Some of this is to be expected. Part of the Fed’s goal in raising interest rates was to curb consumer discretionary spending. Whether people have determined that the prices aren’t worth it or they’re being forced to divert their resources to essential purchases like rent and food, in general, customers seem to spend less with small businesses.

The Fed has planned further rate hikes for 2023 as inflation remains stubbornly high. The pace of these increases could affect consumer spending at small businesses in the coming months.

Supply chain disruptions persist

Running your business like a well-oiled machine means reliable supply chains. In recent years, supply chain disruptions have led to delays and mismatches between supply and demand across industries.

Small businesses have not been spared. Only 13% of small business owners reported no impact on their supply chains in the current environment. The other respondents fell into the following categories:

  • 23% report significant impacts on their business.
  • 30% reported a moderate impact on their business.
  • 32% reported mild impacts on their business.

It is difficult to fill open vacancies

A tight labor market is good for employees, but hard for companies. To run a functional business, you need a reliable and skilled workforce. When key positions are open, you risk overloading your current employees as they try to take up the space.

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Note that labor costs are not necessarily the issue here. While wages rose during the pandemic, that growth never caught up with inflation and is currently on a downward trend. Even during peak growth, labor costs were not a key factor in driving inflation in the first place.

Only 8% of small business owners reported that labor costs were their company’s top issue. A much larger 23% said quality of work, rather than cost, was the biggest issue affecting their bottom line, and 41% reported problems filling open positions.

Even with problems filling vacancies, only 27% of business owners plan to raise wages in the next 3 months. This is a 1% drop since November, which may not bode well for future wage growth.

What a pessimistic view means for Main Street

Prior to the pandemic, small businesses created about two-thirds of employment in the U.S. labor market. They also contributed 44% of economic activity in the country.

If small businesses move south in large numbers, it could have a negative impact on the U.S. job market. It can also have a major impact on local economies.

However, the NFIB’s index is based on small business owner sentiment. While some of these companies are active in the financial sector, the respondents are generally not economists. Their struggles deserve a lot of attention, but their concerns for the future may or may not be justified.

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What a pessimistic view means for Wall Street

If small businesses collide en masse, there may not be an immediate impact on the stock market. Less than 1% of US companies are publicly traded. While not all private businesses are small businesses, there is significant overlap between small businesses and the private sector.

You may not see an immediate impact on the stock market if Joe’s Corner Shop closes, but if enough small businesses close, local economies could suffer. It can affect everything from the labor market to consumer spending.

These factors can then affect consumer spending in publicly traded companies, which can negatively impact the stock market. It can also make investors more skittish when it comes to riskier investments like stocks, which could be a further drag.

it comes down to

So much in our economy is weak. The economic indicators aren’t screaming “recession” right now, but there have been so many unpredictable upheavals in recent years that the conditions we live in feel strange and uncomfortable.

While pessimism among small business owners is never a good sign, it’s not necessarily a crystal ball that accurately depicts what’s to come.

In such uncertain times, you may be concerned about the future of your investments. While times of economic turmoil should already be factored into your long-term investment plans, there are other things you can do to support your investments, such as using an Inflation Kit or choosing Portfolio Protection.

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