Commentary Directory

August NFIB Survey Showed a Tough Environment for Small Businesses

Jacob Hess
September 12, 2023

The NFIB Small Business Optimism Survey for August emphasized the mixed momentum of the recovery in business sentiment as inflationary pressures ease and interest rates rise. The headline Optimism Index fell -0.6 pts to 91.3 which reversed most of the 0.9 pt increase in July. Regardless, it is still the second highest reading of the year which shows that the general upward trend in sentiment from the lows of late 2022 and early 2023 is intact. A similar trigger could be seen in the biggest moving subindex, the General Business Conditions index, which fell -7 pts to -37 in August, offsetting the improvement in July. This reading is still one of the highest in the last two years. The second largest mover was the index tracking small business earnings. It improved 5 pts from a 2023 low to -25. The volatility in these readings suggests that the inflation situation remains largely questionable for many small businesses. In fact, there was a slight uptick in the percentage of survey respondents who saw inflation as their single most important problem.


The slight rise in inflation concerns is consistent with marginal positive movement in the indexes tracking small business pricing. The Actual Price Changes index which looks at price changes over the last three months ticked up 2 pts to 27 after falling near a three-year low in July. The Price Plans index, tracking the expectations of price changes in the next three months, increased 3 pts to 30. This is the second highest in 2023 though not by a substantial amount. The movements in these price indexes suggest that there is some resistance to the disinflationary path which could be revealed in this week’s CPI release. The rise in energy prices has already reversed the course for headline inflation, and the deceleration in core inflation has already more or less stopped. The lingering concern of elevated inflation continues to threaten to increase small business owners’ inflation expectations which would be damaging to the Fed’s ability to maintain price stability.

The subindexes tracking labor force dynamics for small businesses show that there are some signs of easing in the demand for workers. Most noticeably, the current employment index fell back to the lowest value of 2023 at -4, a -2 pt decline, and the job openings index also fell -2 pts to 40, the lowest since February 2021. Both reflect trends in earlier BLS reports on the labor market like the JOLTS report which showed that the official number of job openings has fallen significantly from its all-time high of over 11 million and the employment situation which showed a notable tick up in unemployment to 3.8%. Despite some strength falling out of demand. there is still a sense that labor shortages are still an impact as the labor supply situation still hasn’t fully returned to where it was before the pandemic. A net 54% of respondents are still seeing few or no qualified applicants and, as a result, the compensation plans index ticked up 5 pts to 26, the highest so far in 2023. Overall, it seems that some of the post-COVID excess hiring demand has started to fall away, but the lack of skilled workers is creating a shortage of skills that small businesses are increasingly having to pay more money to get. This will provide some resistance against easing wage growth.

The NFIB surveys are important because they provide an in-depth look into many aspects of small businesses as they navigate the new high interest rate environment. Small businesses reported an average interest rate of 9.0% on short-term loans in August, this is sharply higher than 6.2% a year ago and 4.6% two years ago. The higher cost of borrowing does appear to be having effects on inflation and hiring as we have seen in the trends of the subindexes tracking these dynamics, but in recent months, the trends have started to move sideways. The Fed meets later this month to decide if it will hike interest rates one more time, and it has a lot of evidence to consider in its deliberations. The stagnation in NFIB Small Business Survey in August will likely be a part of the argument for one additional rate hike to tie up loose ends.