Ep. 9: Headline Indexes Hold Steady, but the Underlying Data Reveals More

The Small Business Optimism Index slipped approximately half a point (0.6 points) in May, its third consecutive monthly decline. The Employment Index remained essentially flat, though that’s not the whole employment picture. Beneath those two quiet Indexes are trends pulling small businesses into uncomfortable areas: price increases — both actual and planned — are back to 2022-2023 levels and employment, with unfilled job openings and hiring plans falling to levels last seen in May 2020. Holly Wade and Peter Hansen discuss whether these are early "stress fractures" or a single monthly decline.  

Learn more about the May Small Business Economic Trends report and small business expectations.  

Other highlights include: 

• Inflation back to 2022-2023 territory (1:51) 
• Why the flat Employment Index hides a lot (5:09) 
• Labor quality concerns fall to 2016 levels (7:34) 
• Unfavorable historical comparisons are back (9:50) 
• Capital investment plans at record lows (12:08) 
• Supply chain disruptions creeping back (17:57) 
• What to watch for in the June data (20:20) 

Transcript

SPEAKER_00 0:00

Hi, I'm Holly Wade, the Executive Director of the NFIB Research Center, and joined with Peter Hansen, also with the Research Center, Director of Research and Policy Analysis. And we have the May data for the Small Business Economic Trends Survey, and we have a lot to talk about. The headline measure of the health of the small business sector, our optimism index, fell for the third straight month, and we continue to be below the average for the history of the survey, where it fell about half a point or 0.6 to be exact. And there was a lot of movement. I mean, the index didn't move all that much, but there's a lot of movement within the survey that's very notable. And the two main takeaways are the shifts in inflation and employment. And so those are the two big topics that everybody's talking about outside of NFIB, but also within NFIB. And our survey results showcased that as two major issues for the small business sector. So we'll get into it, talk about whether we're seeing any stress fractures in the small business sector, the small business economy, or if this is just a one-off month that might correct itself going forward. You know, one of those one month does not equal a trend. Two months doesn't equal a trend. Three months, we'll start to get nervous about where things are headed here. But wanted to start off with inflation. Then Peter will go into what we found as far as labor and the employment picture for the small business sector. But when it comes to inflation, we saw a pretty dramatic

Inflation back to 2022-2023 territory

SPEAKER_00 1:51

increase in those planning to increase prices and those who actually increase prices. We're back to those numbers we last saw in 2022-2023. And we're getting into a very uncomfortable environment for small business owners and having to absorb those higher input costs, adjust their prices, try and figure out what things might look like going forward, they're doing it quite rapidly. We're not seeing a deterioration in earnings, and that's the reason why they're passing along those costs as quickly as they can. And again, we're seeing those levels increase. So whether it's still kind of residual from higher tariffs, but most likely it's those gas prices that have been very elevated over the last quarter, and they're having to absorb those higher costs, whether it's in transportation, whether it's in the delivery of their inventories and supplies that have surcharges on them because of those higher delivery fees. All of the different ways that small business owners incorporate gasoline prices into their business, we know that that's one of the major energy sources that they're using for business operations, and it's causing a lot of problems. We're also seeing it in an increase in the percent of business owners saying that inflation is their biggest issue. Right now, it ranks second as far as their biggest problem, and it increased two percentage points. Not a lot, but it is creeping up there. So more small business owners are saying that it's their biggest problem. And again, this is a situation that we haven't seen for a number of years now. It's been elevated, inflation, high prices. It's been elevated since we saw that spike post-COVID. It hasn't settled down to where we were pre-COVID, but we're seeing where it has been over the last number of years start to increase because of those fuel prices. Um, so that's the inflation front. You know, we'll see if this continues to escalate, how uncomfortable this environment will be for small businesses. Um, but it is certainly flowing through into our survey data, and we're seeing the results of what they're having to experience at their businesses across the country. The other story is the labor market, the small business employment situation out there. It's different for different industries. Certainly, it's a complex picture. But I'll turn it over to you, Peter, to talk about our jobs report and what we're seeing on the labor front.

SPEAKER_01 4:42

Yeah, this is, I would say, a deceptively interesting report. When you look at the headline indicators, Holly referenced our optimism index, half a point change. That's nothing huge. We haven't mentioned the uncertainty index. That one's shifted three points, which is a bigger number, but the uncertainty index is more volatile. And so the three-point shift there is like that's pretty quiet. And employment index was essentially flat, 100.4

Why the flat Employment Index hides a lot

SPEAKER_01 5:09

last month, 100.3 this month. So quiet story on the employment front? Well, pretty much absolutely not. Both a little bit within the components that make up the employment index, but actually a little bit more in the employment-related questions and data points in the survey that are not in the index itself. You're seeing quite a challenging story where I think if your intuition is that fuel prices rose three months ago, and that was sort of an immediate challenge, especially to profits, as like the cost went up and the revenues is the same because you haven't immediately increased prices. But not really like a long-term concern. We're in month two, and then now in month three, those difficulties, kind of concerns about their own consumer demand for their end users, becoming a little bit more concrete, starting to lead to more concrete shifts in how they're running their business. And where we see that is right now with hiring. There's a big decline in the number of companies reporting that they have job openings that they can't fill. That's been slowly declining for a long time after the overheated post-pandemic recovery. And it took a big descent this most recent period. Another one that changed quite a bit was labor quality as the top issue and the single most important problem question. You know, inflation was ticking up there, labor quality went way down. That labor quality has been a big issue again since that overheated post-pandemic recovery. It's tailed off to maybe like a more strong economy type level where hiring is difficult, talent is difficult, but not crazy difficult. And the level that it fell to with the May data was a fair bit lower. Now, interesting third point that stood out and was maybe a bit of a surprise, a bit of an outlier. I think even this is one where I wouldn't weigh it too heavily. If I were a betting man, would say, like, ah, this will probably be maybe back to where it was-ish next month is labor cost. Labor cost went up a fair bit as in the May data. Now, when I say wouldn't weigh it too heavily, I don't

Labor quality concerns fall to 2016 levels

SPEAKER_01 7:34

mean to dismiss it. I think really it's a good opportunity to remind ourselves that the level of labor cost as a single most important issue is pretty high. Even before it popped this month, that level was meaningful to businesses. They're facing real labor cost challenges, and that's of course affecting their hiring plans. That's probably part of the story for why unfillable job openings declined. So it's not to say that you know, this big movement in labor cost is something that folks should really be concerned about, you know, the sudden change, but I think it's really an opportunity and kind of a reminder for us that labor cost is an important part of the equation for small businesses, and not for no reason either. If you want to talk more about that, Holly.

SPEAKER_00 8:21

Well, I did want to just highlight two things that you said because it's helpful to look back to see where these levels where we've seen them before. And for the labor parts, you know, these are levels that we haven't seen since May 2020 for hiring plans and job openings. And there weren't that many job openings or plans to hire in the midst of kind of the worst few months of the pandemic. And so going back to those levels is a pretty weak sign as far as the labor market goes for the small business sector.

SPEAKER_01 8:57

I'll jump in to add about the inflation numbers. The actual price increases and the planned price increases, those are back to levels in the 2022, 2023 type era. So that was not to say we're at the peak levels, because the peak levels in that overheated inflation era were much higher than we are right now. But what it's saying is we're getting back to that spike, kind of the start of that spike, right? That territory, not that level, but that territory. Exactly. The same that you're talking about with the employment, it's not to say we're in a pandemic situation on employment. It's not to say we're in a major, crazy 2022 inflation spike on the price metrics, but it's to say we're getting into the era where we're making the wrong kinds of comparisons, like where the past precedents are the really wrong past precedents

Unfavorable historical comparisons are back

SPEAKER_01 9:50

and the ones that you don't want to see when you're caring about the small business environment.

SPEAKER_00 9:54

Yeah, and that's where I was kind of referencing whether this is the beginning of some stress fractures that we're seeing within the small business sector. One other point as a reference to historical data, the percent saying that labor quality is their single biggest problem fell five points. And now we're down to levels that were last seen in 2016. And so this is coming out of a very slow recovery out of the financial crisis. And so again, levels that are a bit concerning from where they were previously, and there doesn't seem to be a lot of investment. So whether that is a level of uncertainty that is reducing investment within small businesses on the capital investment side, but also the employment side, I think is particularly noteworthy for those who have unfilled job openings. They're still at elevated levels, historically speaking, but hiring plans are below the average level over the 52-year history of the survey. So we're seeing a deterioration on that front. We're definitely seeing a deterioration moving towards capital investments of small businesses. The plans, we haven't seen levels like this for years and years. And so small business owners are real hesitant about parting with those dollars. And it's likely, again, uncertainty plays a part in it, inflation plays a part in it, wanting to have that buffer of profits so that they can weather those pressure points if prices start to creep up again. Maybe we're at some level of stabilization, having many of them absorb those higher fuel costs, but they don't know. Nobody knows. And that's one of the problems for small business owners and trying to think about what it looks like in the next three months, what they should do, how they should make decisions that are best for their business, it's really challenging. And there's so many moving parts to this and a lot of money tied up into it. You know, hiring another person is one of the biggest investments

Capital investment plans at record lows

SPEAKER_00 12:08

that they make in their business. If they're thinking about a new purchase of equipment, that's a huge expense for them. And so, as our data shows, for capital spending plans are at record low levels. Actual capital spending, we've seen that they're not interested investing in their business, but then reality happens and you have to spend money. So the reality is they are continuing to spend money and having to invest. But the idea that they're not planning for it is another cause for concern because these are things that are happening to businesses that they're having to pay for. And I'm sure very concerned about what that does to their bottom line as far as also having to absorb those higher costs.

SPEAKER_01 12:58

Yeah. And you know, mentioned the uncertainty and their concerns. Uh I would even use the word pessimism. I think that, you know, when you kind of read the tea leaves of the data and you see, you know, within the index where the components are right now, a lot of the relatively actual like current metrics, earnings back to its level more or less before fuel prices increased, earnings being profits. Then things like actual sales, which is not a component of the index, also looking pretty good. So there's kind of like a really tangible metrics core to the business right now, they're actually okay.

SPEAKER_00 13:39

And that might be the bright spot in this survey right up. Absolutely. That's sales and earnings.

SPEAKER_01 13:46

Yeah. And that and it's an important point because it's like if you think about you can flip a switch and bring fuel costs back down. Well, the negativity is less in some like, oh, I've actually lost a ton of money, or people totally stopped buying. It's more about they're just adjusting expectations in this high inflation environment. They're like, oh, this is a headache for me. I'm hearing probably from my consumers that this is a problem for them. And so I'm anticipating that the next three months, the next six months, the next year are going to be not as good. So I'm skeptical on capital expending. My expectations for sales are lower. My hiring plans are now much lower. So that's where it's like becoming concrete. It's not in the actual concrete. This is what happened last period. It's more in the my plans for going forward. So it's a balanced picture, but in a balance is sort of like it's pessimistic, not as pessimistic as it could be. It's more pessimistic because they're pessimistic rather than because they're at this very moment suffering and having bad business outcomes in terms of profits and actual sales. They're not really yet, but they're feeling a lot of heat and their senses. And I would just add two metrics that sort of like add to like why I say the word pessimism are the expect economy to improve and expecting better business conditions. Those have fallen a lot since the fuel costs went up. They're pretty flat from last month, but that's just flat from a low level. That's flat and very low level, yes. Level that we haven't seen in quite a while.

SPEAKER_00 15:20

So the two other areas that I wanted to touch on before we wrap this up. As you mentioned, sales and earnings, those are the bright spots. Sales is the lifeblood, obviously, of a successful small business. It might be very challenging to operate the business, it might be frustrating. But as long as sales are still strong and supportive, then you can move forward. If that starts to deteriorate, then the adjustments become increasingly painful. But we haven't seen that. I think that a lot of businesses are concerned about if this is on the horizon, a deterioration in sales opportunities. But the two areas that I think are one is kind of similar to the inflation part of it, just makes it more challenging to operate their business, are supply chain disruptions. And we did see an increase in business owners saying that they're experiencing some level of supply chain disruption. And that's a problem. That's a problem in trying to operate your business as efficiently as you can. It makes operations just that much more difficult. So that's something that is challenging, but isn't quite related to a sales problem. What is concerning on the sales front is that when we ask about the health of their business, we saw a bit of deterioration on that front in May. And that is something to look for moving forward in June, July to see if that is kind of a one-month anomaly or if we start seeing some patterns there. And that should be a sign of how things are really doing, current kind of time and place assessment of their business. So that deterioration was a bit of a reality check on everything else about just general health of their business point in time, that more were saying that their business was doing good or fair compared to before, where there were more in the good and excellent camps. So that's an area that we'll all be paying attention to in the next few months.

SPEAKER_01 17:34

Yeah. So you look at the headlines, you look at the top indexes, and you're like, okay, relatively flat. The levels don't love, especially on the uh uncertainty index being very high, optimism index being below average, but they're similar to last month. So nothing too crazy. Then you look under the hood and you just get that little bit concerned of like, ooh, their plans for

Supply chain disruptions creeping back

SPEAKER_01 17:57

going forward are growing increasingly bearish. And that's where I think you get a bit more concerned, especially when you add in their price changes, they are very real.

SPEAKER_00 18:09

Yes. Well, I think that is a wrap for the May data. With that, thank you for all of our members who fill out our monthly survey. We really appreciate your participation in telling us how your business is doing, the operations within your business. It helps us better understand the small business economy. We will see you next month, and thank you for joining us for Small Business by the Numbers.