Small business optimism is at a six-month low – how this affects Main Street and Wall Street


Key receivers

  • According to the NIB’s Small Business Optimism Index, the outlook for small business owners fell to the lowest in six months, with inflation at its highest level.
  • A major concern for small business owners is inflation, which affects how much they spend on materials. At the same time, profits and brand sales are declining, which is causing many small business owners to cut back on price increases.
  • Other concerns for small business owners include ongoing supply chain issues, filling vacancies and finding quality talent.

Last week, the National Federation of Free Business (NIB) released its December 2022 Small Business Optimism Index results. As it turns out, small business owners aren’t feeling too optimistic about the future. In fact, they haven’t felt this pessimistic since June 2022, when inflation was running at 9.1 percent.

In an environment where economic indicators look positive, this feels a little confusing. Inflation is coming down. Unemployment is low.

So why do small business owners feel discouraged? Q.ai is a conglomerate of factors here to help you navigate.

Inflation is down, but still a problem.

Annual inflation has dropped to 6.5% in December 2022, continuing its downward trend. While the move in the right direction is encouraging, inflation of 6.5 percent is still unbelievably high.

In the NIB survey, 32 percent of business owners said inflation was the number one problem hindering their business. 30% of low-profit businesses cite high costs for materials as the main reason eating into the bottom line.

Name sales decreased before further price increases

Why don’t prices just go up if inflation goes up? Part of the problem is that small business owners have seen sales decline over the past several months.

In general, the frequency of positive profit trends has decreased to 30%, which is less than 8% in November. Among businesses that have seen profits decline, the second most commonly cited reason behind inflation is a decline in sales.

Some of these are expected. Part of the Fed’s goal in raising interest rates is to limit consumer discretionary spending. Whether people decide the prices aren’t worth it or are being forced to divert their resources to essential purchases like rent and food, overall, customers don’t seem to spend much time at small businesses.

The Fed has more rate hikes planned for 2023 as inflation remains stubborn. The magnitude of these increases could impact consumer spending on small businesses in the coming months.

Supply chain disruption continues.

Running your business like a well-oiled machine means having a reliable supply chain. Over the past few years, supply chain disruptions have caused delays and imbalances in supply and demand across industries.

Small business owners are not spared. Only 13% of small business owners said the current environment has no impact on their supply chain. The rest of the respondents fell into the following categories.

  • 23% have a significant impact on their business.
  • 30% reported a moderate impact on their business.
  • 32% said it had a moderate impact on their business.

It is difficult to fill vacancies

A tight labor market is good for workers but hard for business. To run a viable business, you need a loyal, competent workforce. When key positions become vacant, your existing staff may be overburdened trying to pick up the slack.

Note that labor costs are not necessarily the problem here. While wages grew during the pandemic, that growth never caught up with inflation and is currently on a downward trend. In the first place, the cost of labor was not a key factor, even with rising inflation.

In fact, 8 percent of small business owners report labor costs as a major issue for their business. A whopping 23% said quality of labor was more of a problem than cost, and 41% said they would fill vacancies.

Even with filling vacancies, only 27% of business owners plan to raise wages in the next 3 months. This is a 1% decrease since November, which may not bode well for future wage growth.

What does pessimism mean for Main Street?

Before the pandemic, small businesses accounted for nearly two-thirds of the jobs in the U.S. labor market. They contributed 44% of economic activity in the country.

If small businesses start moving south in large numbers, it will have a negative impact on the US labor market. It can also significantly affect the local economy.

However, the NIBN index is based on the sentiment of the small business owner. While some of these businesses may work in the financial sector, the respondents are generally not economists. Their struggles deserve a lot of attention, but their worries about the future may or may not be worth it.

What it means for Wall Street’s pessimism.

If small businesses flock, it may not have an immediate impact on the stock market. Less than 1% of US companies are publicly traded. While not all private companies are small businesses, there is considerable overlap between small businesses and the private sector.

If a Joe’s Corner store closes its doors, you may not see an immediate impact on the stock market, but if enough small businesses close, local economies can suffer. It could affect everything from the job market to consumer spending.

These factors could affect consumer spending on publicly traded companies, which could have a negative impact on the stock market. It can make investors more lenient with riskier investments like stocks, which can be an added drag.

Bottom line

Many things in our economy are difficult. The economic indicators don’t scream ‘recession’ right now, but there have been so many unpredictable ups and downs in the past two years that the situation we’re living in feels strange and uncomfortable.

While the pessimism among small traders is not a good sign, it is not a crystal ball that shows exactly what is to come.

In such uncertain times, you may be worried about the future of your investments. While turbulent economic times should be factored into your long-term investment plans, there are additional things you can do to diversify your investments, such as using an inflation hedge or opting into portfolio protection.

Download Q.ai today To access AI-powered investment strategies.



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