Key takeaways

• According to the NFIB’s Small Business Optimism Index, the outlook of small business owners is down to its lowest in six months, when inflation was at a pandemic-era high.
• The primary concern of small business owners is inflation, which affects how much they spend on materials. At the same time, profits and nominal sales are down, which is leading more small business owners to slow down on price hikes.
• Other concerns for small business owners include persistent supply chain issues, trouble filling open positions, and finding quality talent.

Last week, the National Federation of Independent Business (NFIB) revealed the results of its December 2022 Small Business Optimism Index. As it turns out, small business owners aren’t feeling very hopeful about the near future. In fact, they haven’t felt this pessimistic since June of 2022, when inflation was peaking at 9.1%.

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This feels a little confusing in an environment where economic indicators appear to be positive. Inflation is on a downward trend. Unemployment is low.

So why do small business owners feel pessimistic? It’s a confluence of factors that Q.ai is here to help you navigate.

Inflation is down, but it’s still a problem

Annual inflation was down to 6.5% in December 2022, continuing its downward trend. While it’s encouraging that it’s headed in the right direction, 6.5% inflation is still incredibly high.

Thirty-two percent of business owners in the NFIB’s survey said that inflation was the number one problem hindering their business. Of the businesses that reported lower profits, 30% of them cited higher costs for materials as being the primary factor eating into their bottom line.

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Nominal sales are down ahead of further rate hikes

Why not just raise prices if inflation is higher? Part of the problem is that small business owners have seen sales dip over the past several months.

Overall, the frequency of positive profit trends was down to 30%, which is 8% lower than it was in November. Among businesses that have seen decreases in profit, the second most commonly cited reason after inflation was decreased sales.

Some of this is to be expected. Part of the Fed’s goal in raising interest rates has been to curb consumers’ discretionary spending. Whether people have determined the prices aren’t worth it or they’re being forced to divert their resources to essential purchases like rent and food, on the whole, customers appear to be spending at small businesses less often.

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The Fed has further rate hikes planned for 2023 as inflation is still stubbornly high. The rate of these increases may end up affecting consumers’ spending at small businesses in the months to come.

Supply chain disruptions persist

Running your business like a well-oiled machine means having reliable supply chains. Over the past few years, supply chain disruptions have caused delays and skewed supply and demand equations across industries.

Small business owners have not been spared. Only 13% of small business owners reported no impact on their supply chains in the current environment. The remaining respondents fell into the following categories:

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• 23% report significant impacts on their business.
• 30% reported moderate impacts on their business.
• 32% reported mild impacts on their business.

It’s difficult to fill open positions

A tight labor market is good for workers but hard on businesses. You need reliable, competent staff in order to run a functional business. When key positions sit open, you risk overtraining your current employees as they try to pick up the slack.

Note that labor costs aren’t necessarily the problem here. While wages did grow during the pandemic, that growth never caught up to inflation and is currently on a downward trend. Even at peak growth, labor costs were not a key factor in driving up inflation in the first place.

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In fact, only 8% of small business owners reported labor costs as their business’s top issue. A much larger 23% said that the quality of the labor, rather than the cost, was the biggest problem affecting their bottom line, and 41% reported issues filling open positions.

Even with the issue of filling open positions, only 27% of business owners plan to increase wages over the next 3 months. This is a decline of 1% since November, which may not be a good sign for future wage growth.

What a pessimistic outlook means for Main Street

Prior to the pandemic, small businesses created about two-thirds of employment opportunities in the American job market. They also contributed 44% of economic activity in the country.

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If small businesses do start going south in large numbers, it could have a negative impact on the American job market. It could also impact local economies in a big way.

However, the NFIB’s index is based on small business owner sentiment. While some of these businesses may operate in the financial sector, the respondents are not by-and-large economists. Their struggles merit significant attention, but their anxieties for the future may or may not be merited.

What a pessimistic outlook means for Wall Street

If small businesses flounder en masse, there may not be an immediate impact on the stock market. Less than 1% of American companies are publicly traded. While not all private companies are small businesses, there is significant overlap between small businesses and the private sector.

You might not see an immediate impact on the stock market if Joe’s Corner Shop shutters its doors, but if enough small businesses close, local economies could suffer. It could impact everything from the job market to consumer spending.

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These factors could then affect consumers’ spending at publicly-traded companies, which could negatively impact the stock market. It may also make investors more skittish when it comes to riskier investments like stocks, which could be a further drag.

The bottom line

So much in our economy is tenuous. The economic indicators don’t scream ‘recession’ at this current moment, but there have been so many unpredictable upheavals over the past couple of years that the circumstances we’re living through feel strange and uncomfortable.

While pessimism among small business owners is never a good sign, it’s not necessarily a crystal ball that accurately describes what’s to come.

In such times of uncertainty, you might be worried about the future of your investments. While times of economic upheaval should have worked into your long-term investing plans, there are additional things you can do to shore up your investments, such as using an Inflation Kit or opting into Portfolio Protection.

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