Labor: Not The Problem It Used to Be

Mar 12, 2024

In an earlier post, we discussed the latest NFIB survey of small businesses.  While optimism was weak, a particular area of concern was employment.  What businesses reported to be their most important problems reiterated this.  As shown below, of all problems highlighted, labor took a backseat in February with a five percentage point decline in the share of businesses reporting quality of labor as their biggest problem.

When combining with the share reporting cost of labor to be their biggest problem, 27% of businesses reported these labor concerns as their most pressing. As shown below, that combined reading ties June and December 2020 for the lowest since May 2020.

As for what picked up the difference, the percentage of respondents reporting inflation as their biggest problem jumped back up to 23% versus the fresh low of 20% last month.  At that level, inflation is once again the single most important issue among small businesses. That increase is also a bit contrary to the report’s index on higher prices which fell to fresh lows in February.

While the increase in February in the share reporting inflation as their biggest problem doesn’t exactly disrupt what has been an overall trend lower in inflation readings, one more pressing increase has been for poor sales.  As inflation jumped to the forefront in the past few years, the share of businesses reporting poor sales as their biggest problem fell to historically low levels.  While it is still low, the past year has seen a steady climb back up to 7%.

Small Businesses Cut Employment and Spending

Mar 12, 2024

Ahead of this morning’s CPI release, the NFIB updated their Small Business Optimism Index. The headline reading dropped to 89.4 in February compared to 89.9 in January.  That result is the reverse of what was expected as forecasts were penciling in the index to tick up to 90.5.  With the lower reading, small business optimism returns to the low end of the past decade’s range and is only 0.4 points above the post pandemic low set last April.

Diving into the individual categories of the report, breadth was weak.  As shown below, of the inputs to the headline number, there were only two categories that increased month-over-month: Expected Real Sales and Expected Credit Conditions.  As for the categories that are not inputs, every single one fell versus January.  Given these declines, many areas are sitting in the bottom decile of their historical ranges.

One category in which declines are not exactly a bad thing in the current environment are the share of businesses reporting higher prices.  While not an input to the headline index, the higher prices index fell another point down to 21. That is now the lowest reading in just over three years.

Outside of the drop in the inflation reading, some declines in other categories were less reassuring.  As we discussed in today’s Morning Lineup, employment metrics were particularly weak.  Hiring plans have fallen for three months in a row and are now at the weakest level since May 2020.  The drop in compensation plans was even more dramatic falling 7 points month-over-month.  In the history of the data going back to early 1986, the only time this index has fallen by more in a single month was April 2020.

While businesses appear to be significantly curtailing plans for hiring and wages, the actual changes have been a bit more robust.  The actual employment changes remains negative as it has throughout the post-pandemic period, and implying small businesses are on net firing rather than hiring. The compensation index is at the lowest level since May 2021, however, that level is basically consistent with the high end of the pre-pandemic range.  The same would apply for those reporting job openings as hard to fill which came in at the lowest level since January 2021.

Employment is not the only area that small businesses are reportedly cutting back on. Expenditure readings were also weak in the most recent report. For starters, Capital Expenditure Plans have reverted downwards to multi-month lows alongside actual changes to cap ex.  Meanwhile, a net 7% of businesses report plans to cut down on inventories. That is a historically low reading in the bottom 1.5% of all months on record.  Finally, we would note that small businesses have some of the highest expectations for credit conditions since mid-2022.

The report also offers a look at the type of capital expenditures small businesses are making.  That recent drop in capex appears to be driven in part by the largest category: equipment.  Only 35% of respondents reported making such capital expenditures in the past six months, the lowest amount since April through December of 2020.  Prior to that you’d need to go back to May 2014 to find as low of a reading.