The future, for small business owners across every industry, holds both promise and apprehension. The recent economic landscape has been marked by optimism, as consumer spending slowly rises and inflation finally shows signs of slowing — after two years of steady increases. But owners are still cautious about what’s to come, and hesitant to believe a better market is ahead.
Every month, the National Federation of Independent Business (NFIB), which consists of 300,000 small businesses in the United States, publishes a Small Business Economic Trends report. This report is based on survey questions about small business owner outlooks, hiring plans, investment initiatives, expansion and economic concerns. After compiling this monthly data, the NFIB weights the results and determines this month’s Small Business Optimism Index, rating small business owners’ average confidence in the state of small businesses, on a scale of 1-100.
In May, the Small Business Optimism Index rose just 0.4 points, to 89.4. This marks the 17th month in a row with a rating below 98 — the average index rating for 49 years.
These three key concerns are keeping the confidence index low:
Inflation remains a significant challenge and concern for small business owners. According to the NFIB’s May survey, 25% of business owners cited inflation as the biggest problem impacting their operations. Inflation continues to make capital expensive and hard to access by pressuring the Federal Reserve to push up interest rates, which limits the growth of capital-reliant businesses and those looking to expand. Inflation can also hurt consumer spending, as customers opt to save rather than buy in the short term.
As a result of high inflation, small businesses may find it difficult to secure the funding they need for expenses like real estate, expansion, vehicles or new equipment. In 2023 and beyond, banking relationships will become more important, giving businesses the best opportunity to access the loans they need to grow.
The second big concern limiting small business owners’ optimism in the future is the persistent labor shortage and the quality of labor that is available. Nearly 24% of the NFIB’s respondents cited labor quality as a significant challenge hindering their growth, and 44% reported having job openings they were unable to consistently fill. Considering 41% also reported raising wages in May, it’s no wonder that labor costs and labor quality concerns go hand in hand.
With unemployment bottoming out at an all-time low in a handful of states, and sitting at just 3.6% nationwide, small businesses in many industries are finding it increasingly difficult to hire new qualified talent.
These industries are facing the tightest labor shortages across the nation:
- Food service
- Health care
- Social assistance
- Wholesale and retail trade
It’s important to note that labor quality doesn’t just impact small businesses’ ability to hire workers. It’s often tied to the retention of skilled personnel, too. The more companies there are searching for talented workers, the better incentives and benefits these companies are willing to offer to onboard the best talent available. That can make it increasingly difficult and expensive for small businesses to retain their workers, when big companies with deeper pockets can afford to poach their quality talent.
Another complicating factor in the labor market is the growing skills gap. The market is evolving quickly, requiring workers to have increasingly advanced skills just to keep up with the basic technologies small businesses now leverage. That means many businesses are feeling the pressure to find workers without raising overhead, then upskilling those employees in-house.
Increasing commodity costs
The third major concern business owners are facing is closely related to inflation: The escalating cost of commodities. Common commodities like oil, fuel, metals, food and timber are the basic necessary inputs for millions of products. Even minor commodity price increases can put substantial pressure on small businesses to trim other costs, shrink their margins or increase sale prices. This concern particularly impacts small businesses in the manufacturing industry, where raw materials are a significant portion of production costs.
In May, a full 68% of surveyed businesses reported that rising commodity prices were a top concern in the coming months. While short-term price bumps can be compensated for, consistently rising or widely fluctuating costs create a squeeze on business profitability, drive up operating expenses, and can force small business owners to pass high costs onto their customers — potentially impacting long-term demand.
Despite the lower-than-average index rating, small businesses remain hopeful
The number of business owners who think now is a good time to expand their business increased slightly, as did real sales expectations. Plus, with consumer spending up 0.4% in June, further index increases may be just around the corner.
The Small Business Optimism Index does reflect the caution of business owners across the country. But at nearly 90 points in May, and continuing to rise, it also shows the perseverance and enduring spirit of entrepreneurs.
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