Small Business Confidence Dips Amid Rising Costs and Inflation

The official inflation releases have sent mixed signals to the markets recently, but the average small business owner knows without looking at any of the reports that costs are rising rapidly. The continuous surge in operating expenses has severely affected the confidence of small business owners, leading to a decline in optimism to its lowest level since December 2012. This could hinder their willingness to invest in their own businesses or take other risks.

NFIB Data Gives a Clearer Picture

The NFIB (National Federation of Independent Business) Small Business Optimism Index for March revealed a reading of 88.5, marking a decrease from February and the lowest figure seen in over ten years. The NFIB conducts surveys among small businesses in the United States to gauge owners’ sentiments regarding their business outlook. These surveys reflect small business owners’ perspectives on economic conditions, sales projections, and intentions to hire new employees.

Economists consider this index a vital indicator of the U.S. economy’s health and trajectory, given the significant role small businesses play in job creation and overall economic growth. The index’s decline is largely attributed to concerns over rising business costs.

Inflation Is the Top Concern 

Even though inflation may be showing signs of moderation based on some readings, it remains the biggest headache for small business owners. The survey highlighted a substantial concern, with 25% of respondents citing rising costs as their primary challenge. This sentiment is confirmed by the fact that one-fourth of all businesses reported higher input and labor costs as their foremost concern.

Price Hikes and Wage Increases 

To combat rising costs, businesses have hiked prices and have felt a need to increase wages for their employees. According to the survey, a net 28% of businesses raised their average selling prices in March, with an additional 33% planning to do so soon. This price pressure hits consumers and adds another layer to the inflationary snowball effect. 

The labor market also presents a challenge. Businesses are still grappling with a tight job market, as evidenced by the 37% of owners reporting unfilled positions. While the unemployment rate sits at a low 3.8%, these staffing difficulties can reduce business capacity and growth. To attract and retain talent, businesses are raising wages, with a net 38% of small companies reporting increased compensation compared to February. 

Higher Borrowing Costs 

The Federal Reserve’s efforts to combat inflation through higher interest rates are also impacting small businesses. The NFIB report found that 8% of owners experienced difficulties securing loans. This suggests that an increase in interest rates, intended to curb inflation, is making it more expensive for small businesses to borrow money and invest in their company’s future. 

What It Means to Investors

Despite broader economic data hinting at a potential slowdown in inflation, small businesses say they remain under significant pressure. Rising costs across the board, coupled with labor market challenges, are forcing them to increase prices and wages. This strain on profit margins and concerns about securing loans have significantly impacted their confidence and willingness to take chances to pursue any investment opportunities.

While certain inflation indicators suggest a slower rate of price increases, the NFIB data provide a much dimmer view. This is important to investors, as small businesses play a crucial role in overall economic growth. As a leading indicator, when the NFIB is lower than it has been in many years, investors should find out why. In this case, there is one word, inflation, which emerges as the crucial factor driving this decline.