Small business optimism declines in October

Summary

Persistent Price Pressures Dim Small Business Optimism

The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 0.8 points in October to 91.3.

This marks the first decline in the headline index since June. However, persistent inflation, higher interest rates and economic uncertainty has kept the headline index below the 49-year average of 98 for ten straight months.

Inflation issues have endured, with 33% of firms identifying inflation as their single most important problem in October. Firms appear most concerned about eroding profit margins from rising input costs. The share of firms reporting positive profit trends improved one percentage point over the month but remains relatively low at -30%. Of firms reporting lower profits, 34% blamed the loss in profits on rising material costs, 22% blamed weaker sales and 12% blamed rising labor costs.

The net percent of firms reporting higher selling prices fell one percentage point to a net 50%. While still elevated, this is the fifth straight monthly decline in this component, indicating underling inflation drivers may be softening.

Current compensation plans softened slightly, falling one point to a net 44%. That noted, a rising share of firms reported intentions to raise compensation in the months ahead. Businesses planning to raise compensation over the next three months jumped from a net 23% to 32% in October. This is the largest month-to-month jump on records dating back to 1986. The jump in compensation plans sets up the possibility of rising wages placing further upward pressure on inflation.

Plans to increase employment fell three percentage points to a net 20%, reflecting some moderation in terms of labor demand. Although hiring plans have cooled from the all-time high of 32% seen in August 2021, hiring plans are still relatively strong even as firms increasingly cite a deteriorating economic outlook.

Ten percent of firms reported labor costs as their most important problem, and 23% cited labor quality as their chief issue.

Optimism about what lies ahead continued to slip as a net -46% of business owners expect better business conditions over the next six months, a two percentage point drop from September.

Firms continue to feel the impact of disjointed supply chains. In October, 90% of respondents reported supply chains having an adverse impact on their business. Even as firms struggle with supply issues, a net zero percent of respondents reported inventories being too low. This is the first time since June 2020 that the component has dropped out of positive territory as firms have had a chance to let inventories build in the first half of 2022.

Download The Full Economic Indicator