The NFIB’s Small Business Optimism Index lost 2.1 points, dipping to 89.8 in December – the lowest level since July. The reading is below the consensus forecast, which expected it to ease only by four points to 91.5. The index has been below the historical average since the beginning of 2022.
Most of the subcomponents fell on the month. The biggest drivers were economic expectations and earnings, both of which declined by eight points (the latter gave back November’s gain). Among owners reporting lower profits, 30 percent blamed the rise in the cost of materials, 24 percent blamed weaker sales.
Fewer small business owners reported that now is a good time to expand or have plans to make capital outlays in the next few months, as both components deteriorated by 1 point each, reversing November gains.
The only positive change was in the sentiment for inventories reported as “too low” (+3 points), while plans to add more inventories remained flat on the month after a six point deterioration in November.
Fewer firms reported open positions that they were unable to fill, but at 41% (three points lower than in November), the labor market remained tight. As a result, small business owners continue to boost compensation, with 44% (+4 points) reporting higher compensation in the past three months and 28% (-1 ppts) of firms planning to raise it in the next three months. Meanwhile, firms’ hiring intentions dropped to 17% (-1 ppts) – to the lowest level since January 2021.
The net percent of owners raising average selling prices decreased 8 points from November to a net 43% – the lowest since May 2021. This suggests that prices are easing.
Key Implications
The Small Business Optimism Index ended the year on a somber note. Despite the recent trend of easing gas prices, which typically boost business sentiment, owners became more pessimistic about their prospects. While rising input costs continue to be owners top business problem, deteriorating demand makes it harder for them to continue to raise sales prices. This makes small business owners worry about their ability to keep profits and explains the deterioration.
Despite the marginal improvement in the number of firms finding it hard to fill positions, demand for labor remains strong and is the second biggest concern of small business owners. Most of them continue to report that jobs are hard to fill and they plan to attract workers by increasing labor compensation. This too may affect profits in the coming year.
