Rising Prices Squeeze Small Businesses: Only 43% Expect Better Conditions In Next 6 Months

The future doesn't look bright for small businesses, according to the owners themselves.

A new National Federation of Independent Businesses (NFIB) survey of small business owners has placed inflation as the single most important problem in running their businesses.

In August, consumer prices rose to 3.7%, climbing for the first time in 2023 after 13 consecutive monthly drops. Inflation data for September will be made available on Thursday, Oct. 12.

While inflation was largely reduced since a June 2022 peak of 9.1%, rising prices continue to impact the balance sheets of small businesses across the country.

"Sales growth among small businesses have slowed and the bottom line is being squeezed, leaving owners few options beyond raising selling prices for financial relief," said Bill Dunkelberg, chief economist at the NFIB.

While trying to compensate for a rise in prices for energy, labor and goods, small businesses have raised their own prices, putting even more pressure on inflation.

That's leading small business owners to have a pessimistic outlook. Only 43% of small business owners expect better business conditions over the next six months. That's a drop of 6% since the previous reading from August.

There are 33.2 million small businesses in the United States, which account for roughly 44% of the country's entire economic activity, as per the Department of Commerce.

"Owners remain pessimistic about future business conditions, which has contributed to the low optimism they have regarding the economy," said Dunkelberg.

The survey's data shows a historically wide gap between optimism from small businesses based on soft data like expected business and credit conditions, and hard economic markers like job openings and earnings.

The gap has a tendency to contract during Republican administrations, with the least expansion occurring during the Trump presidency. This suggests that political narratives play a crucial role in shaping the optimism of small business owners.

The job market remains strong, which is not necessarily good news for small businesses. Unemployment for September continued at a low rate of 3.8%, unchanged from the previous month. While a strong job market supports solid consumer spending, it could also lead the Fed to maintain decades-high interest rates for longer, or even to raise them further, making the cost of borrowing more expensive for small businesses.

A whopping 65% of small business owners said they were not interested in a loan under these conditions. This reality could hurt public credit companies including the four major banks: JPMorgan Chase & Co JPM, Wells Fargo & Co WFC, Citigroup Inc C and Bank of America Corp BAC, as well as other credit companies like Capital One COF, TD Bank Group TD

A survey by the Department of Commerce from earlier this year shows that 51% of small businesses don't think their access to capital or loans is good.

With poor access to credit and reduced bottom lines, owners are investing in their businesses at historically-low rates, potentially hurting construction and real estate stocks, represented in ETFs like the iShares U.S. Home Construction ETF ITB and the Vanguard Real Estate ETF VNQ.

Small business owners are also having trouble filling job positions. In September, 43% of small business owners reported having open positions they were not able to fill due to a lack of employee expertise. Only 18% of job openings are currently aimed at unskilled labor.

As a result, owners may be forced to raise compensation in order to attract personnel. While only 23% of owners are planning to raise salaries in the coming three months, 36% did so in September. This is good news for current and prospective employees, but bad news for small businesses whose bottom line is reduced by more spending.

That’s spending that is not going into business other expenses like e-commerce, potentially affecting companies like Shopify SHOP and business service companies like Intuit Inc. INTU. 

The NFIB criticized the government for focusing its efforts on supporting specific industries, like electric vehicles and semiconductors, while neglecting the fate of small businesses.

Image made with Midjourney AI.