Small-Business Optimism Falls as Inflation Persists, Companies Struggle to Find Workers

Small-business optimism fell in August after three consecutive months of rising sentiment, according to a new study, as U.S. companies struggled to hire new workers amid persistent inflation.

The National Federation of Independent Business’s (NFIB) Small Business Optimism Index for August dropped 0.6 percent to 91.3, the 20th consecutive month below the 49-year average of 98. The NFIB surveyed more than 600 small businesses.

The U.S. economy continued to grow last month, against a backdrop of higher interest rates and a tumbling real estate market. Overall inflation slowed over the past year, as the Federal Reserve aggressively raised interest rates to their highest level in 22 years.

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Although consumer prices slightly rose from July, many business owners are increasingly concerned about future price conditions, despite solid consumer spending.

Businesses Lose Confidence as Summer Spending Ends

“With small business owners’ views about future sales growth and business conditions discouraging, owners want to hire and make money now from strong consumer spending,” NFIB Chief Economist Bill Dunkelberg wrote. “Inflation and the worker shortage continue to be the biggest obstacles for Main Street.”

Expectations of improved business conditions over the next six months fell seven points in August to a net negative 37 percent, an improvement from last June’s negative 61 percent, but still at recession levels.

The percentage of owners who expected sales to rise fell 2 points from the previous month, to a net negative 14 percent, a three-year low.

Twenty-three percent of small-business owners reported inflation as their single most important problem in August, a rise of 2 points.

Owing to tighter loan requirements, the percentage of firms planning capital outlays fell to a four-month low, although most small-business owners said that all of their credit needs were met.

Businesses that raised their average selling prices in August rose by 2 points to an annual seasonally adjusted 27 percent.

About 40 percent of small-business owners told surveyors that they had difficulty filling positions last month, a slight decline from July and a historic high.

Although fewer firms said they would boost compensation in August, 26 percent said they planned to raise compensation in the next three months.

The construction, service, and manufacturing sectors reported the greatest difficulty in filling open positions, according to the survey. It comes after the Labor Department reported new job openings falling below 9 million in July for the first time since March 2021.

US Households Expected to Face Challenges This Fall

Many U.S. households are facing challenges toward the end of the year, including the resumption of student loan payments, falling cash savings, a tighter credit market, and concerns of another round of Fed rate hikes.

American consumer spending increased 0.8 percent in July, led by a summer boost in the entertainment and travel sectors, while retail sales rose by 0.7 percent.

However, as the summer winds down, the hospitality industry is bracing for a sudden decline in spending as pandemic-era cash runs out, according to the Fed’s latest “Beige Book” report this month.

Morgan Stanley analysts warned in a recent note of a “hangover effect on consumption” in the fourth quarter, which could lead to slower economic growth.

While it’s unknown how any of these factors will affect consumers, fewer economists are expecting a serious recession after repeated warnings of a downturn over the past year.

Optimism over the strength of the U.S. economy has jumped in recent months and some economists believe that the Fed could actually pull off a soft landing and lower inflation to its 2 percent target, without causing a surge in unemployment.

Last week, Goldman Sachs reduced its odds of a U.S. recession over the next year to 15 percent, from 35 percent in March, when the spring bank crisis hit the markets.

Meanwhile, economists await the Labor Department’s August Consumer Price Index on Sept. 13, which is a closely watched inflation gauge by the Federal Reserve.