- The National Federation of Independent Business’ (NFIB) small business optimism index ticked down 0.9 points to 98.2 in October. The index has generally trended lower so far in the second half of 2021. The October headline print came in below market expectations, which called for an increase from 99.1 to 99.3.
- Seven of the ten subcomponents fell on the month, one improved and two remained unchanged. A four-point decline in expectations about an improvement in the economy (-37%) led the pullback. This subindex has fallen 25 points since mid-year and is at its lowest level since 2012. Earning trends (-3 points to -17%) and the share of businesses expecting higher real sales (-2 points to 0%) also fell on the month.
- The survey’s labor market indicators were mixed. The share of firms with unfilled job openings eased two points to a still-elevated 49%, while the share of firms planning to increase employment held steady at 26%. At the same time, the share of firms with ‘few or no qualified’ applicants and ‘quality of labor’ concerns fell 4 points apiece to respectively 58% and 24%. While all of the aforementioned indicators have pulled back on a trend basis in recent months, they remain near their respective all-time highs, indicating that labor demand remains strong.
- Businesses continued to place a heavy focus on wage increases in order to attract and retain workers. The share of firms increasing worker compensation and those planning to do so increased by two points apiece to fresh record highs of respectively 44% and 32%. This was accompanied by an elevated share of firms raising average selling prices (+7 points to 53%) and those planning to do so (+5 points to 51%), with the latter eclipsing its 1970s peak.
Key Implications
- While the headwind from the Delta-driven infection wave continued to subside in October, optimism among small business owners failed to improve. Owners remain skeptical about an improvement in the economy, with this sub-indicator now at its lowest level since 2012.
- Improved public health conditions and rising vaccination rates should offer support to business growth, but the current economic environment also presents challenges. Besides the negative impact of supply-chain disruptions, which is featuring in inventories (an elevated share of businesses continue to report inventories as “too low”), filling open job positions also remains a big hurdle. In fact, ‘quality of labor’ and ‘cost of labor’ remain the biggest concerns for a combined 40% of business owners – far outstripping other categories such as taxes (17%) and government requirements (11%).
- Businesses continue to raise employee compensation in order to attract and retain talent, with compensation metrics reaching new all-time highs in October. Many of these added costs, meanwhile, continue to be unloaded onto consumers, with price metrics also near the highest levels since the 1970s. These dynamics will continue to keep upward pressure on inflation in the near-term, and are part of the reason why the Fed is poised to continue easing monetary support in the months ahead
