Small-Business Optimism About Future Conditions Falls to 8-Year Low, Hiring Difficulties Hit 48-Year High

People eat breakfast at a restaurant that is advertising that they are hiring in Annapolis, Maryland, on May 12, 2021. Jim Watson/AFP via Getty Images

Overall optimism among small-business owners ticked up slightly in August, although the level of confidence in the six-months-ahead outlook for business conditions fell to an eight-year low while hiring difficulties hit a 48-year high, a new report shows.

The so-called optimism index edged up by 0.4 percentage points to 100.1 in August from July, according to the Sept. 14 Small Business Economic Trends report (pdf) from the National Federation of Independent Business (NFIB).

The uptick in overall optimism came alongside a sharp eight-point drop in the six-months-ahead outlook for business conditions. The forward-looking index of future expectations fell to a reading of negative 28 percent, the lowest number since January 2013.

“As the economy moves into the fourth quarter, small-business owners are losing confidence in the strength of future business conditions,” said NFIB Chief Economist Bill Dunkelberg.

At the same time, 50 percent of small business owners reported job openings that could not be filled. This is a one percentage point increase from July and a 48-year record high.

“The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions,” Dunkelberg said.

Small businesses responded to the hiring crunch by raising wages, with 41 percent reporting boosting compensation in August, up three points from July and also a 48-year high. Ten percent said labor costs were their top business problem while 28 percent said labor quality was their chief worry, with both readings hitting record high levels.

“As the economy moves into the fourth quarter, the big question mark is LABOR, its availability, its cost, and the impact on inflation,” the report’s authors wrote.

Inflation won’t be a problem for businesses as long as they can pass rising input costs, including labor, on to consumers in the form of higher selling prices, the authors argued, “but if consumers become price-shy, then profits will be squeezed and firms will have to adjust costs quickly, including labor costs.”

Upward pressure on labor costs was a key theme in a recent report from the Chicago Federal Reserve on business conditions in the central bank’s 7th district, which painted a picture of slowing growth and record-high labor cost inflation.

The Chicago Fed Survey of Business Conditions, released on Sept. 13, shows that the headline business activity index fell to a reading of minus 2 in August from plus 14 in July, suggesting August growth fell below trend. The labor cost index rose to a series high of plus 42 in August, up by two points from July and the highest reading in the eight-year history of the series.

Meanwhile, the Fed’s so-called Beige Book, which provides a snapshot of business conditions across the Fed’s 12 districts and which was partly informed by the Chicago Fed’s data, shows that many businesses facing input cost inflation said they plan to pass higher prices on to consumers.

Consumer price inflation in the 12 months through August stood at 5.3 percent, 0.1 percentage points lower than the June and July figure, which was the highest annual spike since 2008.