Growth Companies

Small Business Optimism Slips 2 Points

SMB owners reported lower profits in the last quarter and expect real sales volumes to fall in the first half of 2023, found the NFIB's survey.
Small Business Optimism Slips 2 Points
Photo: Getty

While the NFIB monthly small business owner survey is not a market mover, it’s a solid indicator of the SMB owner’s viewpoint of macroeconomic conditions as well as the actions SMBs take in response to them.

The sentiments of small business owners, after an uptick in November 2022, dipped again in December, hitting a six-month low, according to the latest NFIB (formerly called the National Federation of Independent Business) survey results released on Tuesday. 

The NFIB’s Small Business Optimism Index declined 2.1 points in December to 89.8, marking the 12th consecutive month below the 49-year average of 98. That makes small business owners surveyed by the NFIB now less optimistic than they were in April 2020, the early days of the COVID-19 pandemic.

Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate. — NFIB Chief Economist Bill Dunkelberg

The index is based on 10 survey indicators, not the answer to a single question, so it encompasses SMBs’ plans to, for example, increase employment, fatten stocks, and make capital outlays. In addition, the survey measures SMBs’ expectations for overall business conditions, sales, profits, and job openings.

Nearly one-third of SMB owners said inflation is the top problem in operating their business.

Owners expecting better business conditions over the next six months worsened by eight points from November to a net negative 51%. (The net number is the difference between the percentage of respondents who said business conditions would improve minus the percentage who said business conditions would worsen.)

Likewise, the net percent of SMB owners expecting higher real sales volumes deteriorated two points to a net negative 10% (higher sales minus lower sales). And a net negative 30% reported lower profits in the last three months, with those reporting lower profits blaming the rising cost of materials (30%), weaker sales (24%), labor costs (12%), lower prices (9%), and the usual seasonal changes (8%).

Only a net positive 5% of SMBs think the next three months are a good time to set in motion expansion plans.

“Overall, small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate,” said NFIB Chief Economist Bill Dunkelberg. “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.”

Two of the biggest problems for owners, high inflation and difficulty finding workers, might be easing, according to some experts. The share of owners raising average selling prices decreased 8 points to a net 43%, down from 63% in June 2022. But that could also indicate an inability to raise prices. 

Less than half (41%) of owners reported job openings that were hard to fill, down three points from November and off 9 points from June’s reading of 50%.

Yet, SMBs continue to pay up to get workers. A seasonally adjusted net 44% reported raising compensation in the last three months, a number that has remained fairly consistent since August 2021. But a smaller percentage of SMBs (a net 27%) plan to raise compensation in the coming three months.

The good news for suppliers to SMBs is that 55% reported capital outlays in the last six months, unchanged from November. Of those making expenditures, 37% reported spending on new equipment

Less than one quarter (23%) plan capital spending in the next few months, an amount not far off the monthly reading for the past five years.

If small businesses are financing some of those outlays with debt, the investments are getting more expensive. (More than a net one-quarter [28%] of respondents reported borrowing on a regular basis.) Nearly a quarter (23%) of SMB owners on net said they paid a higher rate on their most recent loan.

The average rate paid on short-maturity loans was 7.7%, nearly 3 percentage points more than 3-month LIBOR and 3.4 percentage points above Tuesday’s Secured Overnight Financing Rate. That average rate paid by the SMBs surveyed was up from 5.3% a year ago.