Reflections on Business Trends and Outlook Survey Data Release
Small business survey, we hear you
Small businesses are the backbone of the American economy. They make up nearly all businesses in the U.S. and account for about two-thirds of new job creation. Representing 44% of the U.S. economy and employing half the workforce, small businesses are integral to our daily lives. Think about the small businesses you frequent—your barber, grocer, web designer, dog groomer, pub, the locally owned boutique, even your local banker. In Missouri alone, nearly half the workforce is employed by small businesses.
Given their significance, I was particularly excited to see the release of the latest Optimism Index from the National Federation of Independent Business (NFIB). This index surveys small business owners to gauge their sentiments about the current state of the economy and their future outlook. While it’s just one data point, it offers invaluable insights into the mindset of small business owners.
Key Takeaways from the Latest Optimism Index
Sales Expectations
Current Sentiment: 14% of small business owners reported higher sales over the past three months. However, the percentage expecting higher sales in the coming months has dropped to -13%. Sales are the lifeblood of any business. While looking backward is informative, I’m more interested in future expectations. The cautiousness among small business owners regarding future sales is palpable. But why? Remember, small business owners buy from other small businesses and consumers. Consumers are stressed; savings have decreased significantly, debt is up significantly, delinquencies are up, and defaults are up. I get it, small business owners are concerned about the state of the consumer.
Economic Concerns
The cautious sentiment could be due to persistent high costs across the board. When costs are high, many of us are inclined to pull back unless the potential return on investment is significantly higher than the expenditure. According to the index, inflation remains a significant concern, with 22% of small business owners ranking it as their top issue. This figure has remained unchanged from previous months. Additionally, 20% are worried about the quality of available labor. It’s not just about having enough workers but having the right talent. Many small businesses are getting smarter about their talent strategies, often augmenting human resources with technology. This is a trend we all should pay attention to.
Price Adjustments and Capital Spending
Pricing is always interesting because if small businesses can’t pass on costs to customers, survival becomes challenging, which can also impact their banking partners. Capital spending plans are equally crucial as they often involve new loans. Current Sentiment: 25% of businesses raised prices in May, and 28% plan to do so in the next three months. Remember who their customers are—it's you, me, and other businesses—so you too will feel the pain. But what are they to do? My barber told me that her rent goes up every year, and customers complain about a $1 increase. I get it. It’s a dilemma. Are you seeing this? Additionally, 58% reported making capital outlays in the past six months, with 23% planning further capital purchases. The slowing pace of capital investment mirrors what we are seeing in banking. The pullback in capital spending will start to show up even more in GDP numbers. Gross Domestic Product, or GDP, is like a scorecard that measures how well America’s economy is doing. People and businesses pull back on capital expenditures when we are uncertain. I generally look out 12-18 months personally to assess how I feel about my work situation. If I don’t feel good, I conserve. Small businesses are moving into conservation mode. They understand that a strong balance sheet is so important if and when the economic climate shifts more than it already has to the negative.
Credit Conditions
Current Sentiment: Only 7% of small business owners expect better credit conditions in the next three months. This suggests that small business owners are betting on higher interest rates lingering longer. “Credit conditions” is always a buzzword for how easy it is to borrow money, which equates to the cost of that money and how many banks are actively lending, so cost and ease! The current inverted yield curve—where short-term rates are higher than long-term rates—is an anomaly. Typically, lending money for a more extended period should be more expensive due to increased risk. If you let someone “hold” some money for a day, the price is going to be lower than if you let them “hold” that same money for two years. The longer they hold it, the higher the risk, and thus, the higher the cost. Current Sentiment: 58% of small businesses are not interested in taking out loans, although 31% borrow regularly. Don’t take out loans if you don’t need them. Having a line in place for emergencies might be worth it, even if you pay a non-usage fee. Those using credit likely do so for growth and cash management, which is prudent.
Challenges in Financing and Expansion
Current Sentiment: 6% of small business owners identified financing as their top problem, the highest rate in 14 years. With the cost of borrowing currently high, it’s understandable. Think of a loan as rent; rents have skyrocketed in recent years but are now stabilizing in some areas. Additionally, only 4% believe the next three months are a good time to expand. Like these business owners, I sense that another economic shoe may drop, though it’s unclear what that will be. Historically, an inverted yield curve has often preceded a recession. Whether or not a recession occurs, the goal should be to maintain a well-run, resilient business. You want to still be standing on the other side of the recession.
Final Thoughts
The data from the latest Optimism Index provides a snapshot of the challenges and opportunities facing small businesses today. While the economic landscape remains uncertain, the cautious optimism displayed by small business owners is both prudent and necessary for navigating these times.
If you're a small business owner, consider these insights as you plan your next steps. And remember, staying informed and adaptable is key to weathering economic fluctuations. For additional guidance on navigating these challenges, hit me up at heyorv@midwestbankcentre.com or just follow my notes at the accidentalbanker.com – I’ll be publishing more on my observations soon. Let's work together to ensure your business thrives, no matter what the future holds.