The Big Idea
Small businesses speak out
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The latest monthly survey from the National Federal of Independent Business confirms what plenty of other evidence indicates about the economy. Economic conditions have improved but are not extraordinary—at least not yet. What is extraordinary is the degree of stress in labor markets as well as pressure on both wages and prices, an ominous sign that the FOMC’s confidence that the bulge in inflation is entirely transitory may prove misplaced.
NFIB survey
The National Federation of Independent Business, a trade group representing businesses with 50 or fewer employees, regularly surveys its members. Its monthly survey typically receives around 600 to 700 responses, and its larger quarterly survey can return 1,500 or more responses. The poll has been conducted since the 1970s, offering a rich historical picture for a number of key elements of the economy.
General economic outlook
In June, small business optimism improved, as the headline index jumped by nearly 3 points to 102.5, the best reading since October, though still noticeably lower than pre-pandemic levels. Interestingly, despite robust growth in demand for most industries, small business owners were not especially excited about the near-term future. The survey asks about the outlook for expansion, defined as the proportion of respondents who felt that the next three months would be a good time to expand (Exhibit 1). Only 15% of owners thought so in June, barely more than half of the proportion seen before the pandemic.
Exhibit 1: Outlook for expansion
Source: NFIB.
Respondents’ outlook for general business conditions were downright gloomy, despite robust economic growth. The net proportion who felt that the economy would improve over the next six months picked up sharply in June but remained deep in negative territory (Exhibit 2). This group is sharply opposed to taxes and government regulation, so the pessimism may in part reflect the assumed direction of government policy going forward. It may also be driven by the difficulties associated with rising input costs and labor shortages.
Exhibit 2: Outlook for general business conditions
Source: NFIB.
Whatever the reason, small businesses were relatively cautious, with both actual and planned capital expenditures in June holding well below the prevailing range prior to the pandemic.
Labor market stress
Small business hiring has been underwhelming. The net proportion of firms adding workers has hovered near zero in recent months (Exhibit 3).
Exhibit 3: Actual employment changes
Source: NFIB.
At first glance, this might seem to imply that the demand for workers is tepid. Fed officials appear to be making this mistake, relying on the level of payroll employment or the unemployment rate to assess the health of labor demand. The NFIB survey makes clear that small businesses are desperately trying to add staff. The net proportion of respondents planning to increase employment in the next three months reached an all-time record going back 35 years for the second straight month in June (Exhibit 4).
Exhibit 4: Hiring plans
Source: NFIB.
Moreover, nearly half of the respondents have positions that they are not able to fill, which works out to roughly 90% of the firms that are trying to hire (Exhibit 5). This is far and away higher than at any time over the past nearly 50 years.
Exhibit 5: Unfilled job openings
Source: NFIB.
These results make clear that small firms are trying hard to staff up but have been stymied, just as larger companies have been, by a lack of available workers.
Wage and price pressures
Thus, notwithstanding an elevated unemployment rate, labor markets at the moment are as tight as they have been in decades. Given the open positions that small businesses have been futilely trying to fill, they have been ramping up compensation offers to sweeten the pot. Focusing on the net proportion of firms increasing compensation over the last three months, the June reading surged by 5 points to +39, an all-time high going back 35 years (Exhibit 6).
Exhibit 6: Actual compensation changes
Source: NFIB.
Moreover, firms expect to continue to raise compensation. The net proportion of respondents planning to increase compensation in the next three months has also surged this year, matching the all-time high in June (Exhibit 7).
Exhibit 7: Compensation plans
Source: NFIB.
Small businesses are also raising prices to a degree not seen in decades. The net percent of firms raising prices compared to three months ago has surged by 30 percentage points in five months, reaching the highest reading since 1981 in June, a time when inflation was close to double digits (Exhibit 8).
Exhibit 8: Actual price changes
Source: NFIB.
Moreover, firms’ plans call for more price hikes. The net proportion of small businesses planning to increase prices over the next three months moved to +44 in June, the highest reading since 1979 (Exhibit 9).
Exhibit 9: Price plans
Source: NFIB.
Conclusion
The NFIB small business survey offers clear evidence that the economy is currently struggling to expand fast enough to meet torrid demand. Small firms have found it quite difficult to staff up as much as they would like. As a result, they are aggressively raising wages to try to draw more workers in. The combination of surging input costs and ongoing wage hikes is dramatically changing the cost structure and firms are successfully passing these costs along to their customers in a fashion not seen since the dreadful times of the late 1970s and early 1980s.
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