NFIB’s Small Business Optimism Index rose 1.3 points to 91.9 in December, coming in above market expectations for a modest increase. Despite the increase, the index was still 6 points below its historical average of 98 points.
Five of the ten subcomponents improved on the month, three deteriorated, and two remained unchanged. Leading the gains were earning trends (up 7 points to -25%), along with expectations about an improvement in the economy (up 6 points to -36%) and higher real sales (up 4 points to -4%). On the other hand, current inventory took a notable step back, falling 5 points to -5%.
The share of businesses planning to increase employment fell 2 points to a still-decent 16%, while the share of firms with unfilled job openings held steady for the second consecutive month at 40%. Of note, quality of labor concerns fell 4 points, with 20% of business owners identifying this as their top business problem. Given the sharp drop in the latter, inflation replaced labor quality as the top concern among small business owners (up 1 point to 23%).
The share of firms increasing compensation was unchanged at 36%, the same as in the pre-pandemic period. Meanwhile, the share of firms planning to raise compensation over the next three months fell one point to 29%, which is not far off the 32% historical high set earlier in the pandemic. The share of businesses ‘raising’ average selling prices was unchanged at 25%, while the share of firms planning price hikes in the next three months fell 2 points to a still elevated 32%.
Key Implications
The improvement in small business confidence at the end last year – albeit from low levels – is encouraging, especially since it was accompanied by enhanced outlooks on the economy, earnings trends and sales. What’s more, labor market indicators continue to show resilience, with job opening still plentiful and businesses continuing to place a focus on hiring workers. Nonetheless, it’s worth noting that this latter theme is gradually losing some of its luster. This is evidenced by a gradual easing in plans to boost employment, and the fact that quality of labor concerns pulled back notably in December.
With the labor market still tight, the share of businesses planning to raise compensation in order to retain and attract new workers remains elevated. The share of businesses planning to raise average selling prices has also trended higher, which points to some upside risk for inflation over the near-term – a factor that would work in favor of the Fed showing some patience before it begins to lower interest rates later this year.
