Small-Business Optimism Dives to Six-Month Low, Inflation Cited as Top Problem

Guests shop at the TJ Maxx store in the Mall at Prince George's in Hyattsville, Md., on Aug. 17, 2022. Chip Somodevilla/Getty Images

Optimism among small businesses continues to remain weak amid decades-high inflation and concerns about the future of the economy, the latest survey by the National Federation of Independent Business (NFIB) shows.

The NFIB Small Business Optimism Index fell by 2.1 points, to 89.8, in December, which is the twelfth consecutive month it remained below the 49-year average of 98, according to a press release on Jan. 10. This is the lowest level since June. Inflation was cited as the single most important business problem by 32 percent of respondents. The percentage of owners who expect business conditions to worsen over the next six months rose by 8 points, to a net negative 51 percent.

“Overall, small-business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate,” said Bill Dunkelberg, the NFIB’s chief economist.

“Owners are managing several economic uncertainties and persistent inflation, and they continue to make business and operational changes to compensate.”

Among respondents who reported lower profits, 30 percent blamed it on the increase in the cost of raw materials, 24 percent on weaker sales, 12 percent on labor costs, 9 percent on lower prices, 8 percent on usual business change, and 3 percent on higher regulatory or tax costs.

While 44 percent of business owners reported raising compensation, a net 27 percent plan on doing so over the next three months. Labor costs were cited as a top business problem by 8 percent of owners, while 23 percent saw labor quality as a major business issue.

Inflation and Recession Worries

According to Jan. 5th news release detailing JPMorgan Chase’s 2023 annual Business Leaders Outlook survey, 61 percent of small businesses and 65 percent of midsize businesses are expecting a recession this year.

Forty-five percent of small businesses cited inflation as a top challenge in the year ahead, up from 20 percent a year back. When it came to midsize businesses, 91 percent admitted to facing inflation challenges. Both business groups are reevaluating their pricing, material sourcing, and operational approaches due to inflation.

While 94 percent of small businesses said inflation has not impacted expenses, 38 percent admitted to a 11 percent increase in expenses due to rising costs. Majority of small businesses believe that higher costs of material, shipping, rent, and labor are here to stay.

“While we have seen some encouraging signs that inflation has started to moderate and should cool over 2023, businesses may still want to consider adjustments to strategies, pricing, or product mixes to help weather the storm in the near term,” said Ginger Chambless, head of research, JPMorgan Chase Commercial Banking.

Tax Relief

As small-business owners struggle in the current economic environment, Republican lawmakers have introduced the H.R. 23 bill in the House that seeks to cut $72 billion set aside for the Internal Revenue Service by the Inflation Reduction Act. The funds are supposed to be used to hire thousands of agents and staff.

Republicans insist that the funds granted to the IRS must be cut or else the agency would unfairly target Americans and small-business owners with audits.

The NFIB has extended support for H.R. 23. “Instead of concentrating on enforcement and penalties, this legislation charges the IRS to focus on customer service and modernizing operations to assist taxpayers,” NFIB president Brad Close said on Monday.

“As NFIB members have voiced their frustrations with the IRS’s significant delays and lack of customer service, this legislation is a step in the right direction.”