Small Business Owners Still in Recovery Mode

I trust you had a pleasant Easter weekend having time with family or friends. This weekend we had our three adult children, their spouses, and their 10 children all together for the first time in ten years. The last time we were all together, we had family photos taken. One shot was of the five grandchildren at the time sitting together on a blanket which was from ages seven to one. We had a photographer come out yesterday to take family photos again for a much larger group. The day was perfect, with mild temperatures and overcast skies for excellent outdoor lighting. One shot we had taken was of the same five grandchildren, now 17 to 10 years of age, in the same pose on a similar blanket. I could only imagine what they would look like in ten more years. Great fun being together, and we are very thankful for our growing family.

Yesterday, the National Federation of Independent Businesses (NFIB) Research Center released its small business optimism index based on a survey of its members. The index is a composite of 10 seasonally adjusted components based on the following questions:

• Plans to increase employment

• Plans to make capital outlays

• Plans to increase inventories

• Expect the economy to improve

• Expect real sales higher

• Current Inventory

• Current job openings

• Expected credit conditions

• Now is a good time to expand

• Earnings trend

The index dropped to a three-month low of 90.1 and its 15th consecutive month below the 49-year average of 98.

From the late 1980s through 2006, small business owners were mostly optimistic, with index readings mostly above 98, with two exceptions in 1991 and 1993. However, small business optimism dropped to its lowest level in 2007 during the Great Recession, and it wasn’t until 2017, ten years later, that the NFIB index scored again above 98.

Unfortunately, for small businesses, it was a short-lived period of strong growth that changed dramatically in 2020. The coronavirus spread prompted governments around the world to implement draconian regulations requiring most small businesses to restrict or prohibit meeting with customers in person. The index plummeted to a ten-year low. The American entrepreneurial spirit and drive to survive was exhibited by small business owners who quickly adapted to new regulations that included setting up employees to work at home while others created drive-up lanes for customers to be handed pre-purchased items from food to plumbing supplies.

Apparently, small business owners had confidence in the strength of the previous five years, and once they were able to adapt to new regulations and keep their business afloat, they reported by mid-2020 renewed optimism with the index recovering back above 98 and nearly back to the previous high levels reached in 2019. Since peaking in mid-2020, small business optimism has trended lower and now, in its 15th consecutive month below its 49-year average.

From the NFIB Report, NFIB Chief Economist Bill Dunkelberg was quoted as saying,

“Small business owners are cynical about future economic conditions. Hiring plans fell to their lowest level since May 2020, but strong consumer spending has kept Main Street alive and supported strong labor demand.”

Other highlights in the report included:

• 43% of owners reported job openings that were hard to fill

• The net percent of owners raising average selling prices decreased one point to a net 37 seasonally adjusted

• The net percent of owners who expect real sales to be higher deteriorated six points from February to a net negative 15%

• Seasonally adjusted net 15% of owners are planning to create new jobs in the next three months

• 26% reported having few qualified applicants, while 27% reported none

• 11% cited labor costs as their top business problem, and 23% said labor quality was their top concern

Regarding supply chain issues, 19% reported disruptions still having a significant impact, while 31% reported moderate impact and 35% reported mild impact.

The Federal Reserve rate hike campaign has surprisingly not had a material impact on small businesses. Only 2% of owners reported that all their borrowing needs were not satisfied, while 29% reported all credit needs were met. Interestingly, 59% said they were not interested in acquiring any new loans.

What Does This Mean to Me?

The health of the US economy is dependent on the health of small businesses and consumers. Combined, these two groups are the most impactful for the US economy, with small businesses representing 99.9% of all businesses and 66% of GDP spending by consumers. The NFIB Small Business index is below its 49-year average, primarily due to supply issues, inventory, and labor challenges.

I thought it was positive that lending needs and rising interest rates were minor factors for small businesses, with 59% stating they were not in need of any new loans.

The media has tried to keep a storyline of a banking crisis and a Federal Reserve rate hike campaign driving the economy into a recession. However, it is positive that there are currently no new reports of banks in trouble, and the economy is still in positive growth.

According to Nerdwallet in its January 2023 article titled, “ Small-Business Statistics: Numbers to Know for 2023”:

Although 80% of small businesses having no employees, they still employ 46.4% of all employees
Small Businesses with employees have been responsible for 66% of all new jobs since 1996

It will seem that if rising interest rates and acquiring new loans do not have a major impact on small businesses that employee almost half of all employees, then the risk of a recession would seem diminished.

The S&P 500 has remained in a positive technical trend since October 2022.
The index continues to outpace the momentum of the past 20, 50, and 200-day averages.

The same technical positive trends are also true for NASDAQ.

We maintain our favorable view of the US economy and stock market. Let us know if you have any questions about this Weekly Brief or your accounts. We welcome the opportunity to be of assistance.