Commentary Directory

NFIB Small Business Optimism: March 2024

Jacob Hess
April 09, 2024

NFIB's Small Business Optimism Survey offered a poor picture of the economic environment for small businesses in March. With a decline of -0.8 pts in the headline index, optimism came in below expectations and is now at the lowest level since December 2023. The headwinds for small businesses have finally reached new lows after the initial decline that followed elevated inflation and the Fed's rate hike campaign in response. A huge drop in sales expectations was the main reason for the decline in the headline optimism index. Specifically, the Sales Expectations index dropped -8 pts to -18, the lowest since May 2023 and the largest single month drop since May 2022. The combination of increasing costs and weaker expected sales volumes is creating a dismal environment for earnings. Fourteen percent of firms pointed to weaker sales volumes as reason for lower earnings (vs 11% a year ago), and 17% of firms pointed to higher costs as causing lower earnings (vs 12% a year ago). Notably, the percentage responding increased costs is only slightly lower than the 20% that responded at height of inflation two years ago.

On the topic of prices, the NFIB report in March is particularly bad news for the upcoming CPI report as small businesses reported higher prices in every metric tracking prices and wage growth in the survey:

  • The NFIB Actual Price Changes index jumped 7 pts to 28, the highest since June 2023.
  • The NFIB Price Plans index grew 3 pts to 33, back to the high of 2024.
  • 25% of owners reported that inflation was the single most important problem in operating their business, up 2 pts from February. The percentage is 1 pt above 24% a year ago.
  • The NFIB Actual Compensation Changes index up 3 pts to 38, second highest since July 2023.
  • The NFIB Compensation Plans index up 2 pts to 21.
  • 10% cited labor costs as their top business problem, down -1 pt from February and only 3 pts below the highest reading of 13% reached in December 2021.

The broad indication of inflation amongst the responses of small businesses is almost a consensus that we can probably expect a relatively hot CPI reading tomorrow. The unfortunate thing about this is that data is suggesting that consumers' purchasing power is weakening and demand is unlikely to keep up with renewed inflationary pressures. Hence, we have the worsening earnings outlook.

On the employment front, the subcomponents point to a gentle decline in the demand for labor. The Actual Employment Changes index remained negative, dropping -1 pt to -2, and has been negative or zero for the last 13 months. While small business employment appears to be shrinking, there are no signs of capitulation yet. In fact, the Job Openings and the Hiring Plans indexes are both still positive, indicating the the outlook for labor demand is still somewhat positive, but both are at or near post-pandemic lows. The former was unchanged in March at 37 (lowest since January 2021), and the latter was down -1 pt to 11 (lowest since May 2020). The differential between actual and expected employment changes is probably driven by the inability of small businesses to fill key positions due to the lack of qualified applicants (a net 48% report there are “few” or “no” qualified applicants) while roles that are more cyclical are being trimmed.

To add to all of the pain described above, the “higher for longer” Fed continues to weigh on small business credit conditions. The Availability of Loans index at -8 is just off the low in 2023 and is signaling the moderate difficulty smaller firms are having in finding financing. And when they do find financing, the costs are substantial. A net 17% of small businesses are seeing higher interest rates than 3 months ago, and the NFIB finds that the average interest rate paid on short-term loans is back to the post-pandemic high of 9.8% after easing to 8.7% in February. That premature easing likely came from rising Fed cut expectations that in Q4 2023 that have been reversed in the last two months. The 2-year Treasury yield is now back above 4.75%, a higher for 2024.