Small business confidence drops as inflation weighs on outlook

Optimism among small business owners fell below a 49-year average in March as inflation, tighter credit conditions and difficulty finding workers weighed on the outlook.

The National Federation of Independent Business’ (NFIB) optimism index fell to 90.1 last month from 90.9 in February, the group said in a report Tuesday.

“Small business owners are cynical about future economic conditions,” NFIB Chief Economist Bill Dunkelberg wrote in the release. “Hiring plans fell to their lowest level since May 2020, but strong consumer spending has kept Main Street alive and supported strong labor demand.”

Inflation remained the single most important issue impacting small businesses, with 24% of business owners flagging this as the biggest operational problem facing their companies.

Meanwhile, labor was the second-biggest problem for small businesses, with 43% of all owners reporting that job openings were difficult to fill, the NFIB’s survey showed.

The concern comes as new federal hiring data released Friday showed that the labor market continues to add jobs at a strong pace. Employers added 236,000 jobs in March while unemployment stayed low at 3.5%

According to NFIB’s monthly jobs report, a seasonally adjusted net 15% of owners are planning to add new jobs in the next three months. Still, about 26% of owners said they got few or no qualified applicants for their open positions.

Punta Gorda, Florida, Fishermen's Village, Captain's Table restaurant waitress serving lunch.  (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

Punta Gorda, Florida, Fishermen’s Village, Captain’s Table restaurant waitress serving lunch. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

About 59% of small business owners reported hiring or trying to hire in March, down one point from last month, according to the NFIB survey. Yet, elevated labor costs have become a burden to small business operators, with 11% reporting the concern.

Separately, a net 42% of small business owners said they raised compensation while about 22% plan to increase compensation in the next three months.

As inflation is costing small businesses money, a net 37% of owners said they raised their selling prices, the lowest since April 2021. But some owners expect higher sales volume to deteriorate to a net 15% amid economic uncertainty.

Still, more small businesses reported having greater difficulty getting a loan in March after multiple bank failures led to tightening credit conditions. A net 9% said their last loan was harder to get than the previous time, up 4 percentage points from the previous month.

“The March survey ought to capture at least some of the impact of the banking crisis on small business owners’ confidence, and it’s not pretty; the decline in the headline index reverses the modest gain since the start of the year, and leaves it 12.4 points below its recent peak in June 2021,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in the following release.

“Small businesses are captives of their banks, and the overnight change in the way markets view regional banks means they have been catapulted into survival and liquidity mode. Lending growth was slowing long before SVB failed, but the declines in the March NFIB measures of current and expected credit availability mean we have to expect much weaker lending numbers over the next few months,” he added.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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