Lightning Talk: The Current State of the Small Business Economy (With a Heavy Dose of Uncertainty)

Introduction by Bailey Reutzel, Strategy and Content, American Banker Live Media

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Holly Wade (00:08):
Thank you, Bailey. Thank you for the invitation to talk to you about the small business economy. I'm Holly Wade. I run the Research Center at the National Federation of Independent Business. NFIB is the largest small business association that represents roughly 300,000 small business owners across the country and across industry. To give you a bit of perspective before we get into the slides so that you can navigate these charts that I will show and highlight, our members are roughly 90% employer businesses, but very small. I always say it's hard to track because small businesses increase or decrease employment size all the time. But for our membership, we average around five to 10 employees. As the previous speaker was saying, Main Street and those types of businesses—whether it's retail, the laundromat, the dry cleaner, the auto repair shop, the restaurant, the local construction company, the local CPA—those are the types of small business owners that NFIB represents.

(01:27):
And so we advocate on their behalf on the issues that are most important to them. In the research center, the purpose of our center is to better understand the changing operations of small businesses and their owners in adjusting to different economic conditions, but also to policy shocks that they have to navigate. I will start with our survey. This is a survey that we conduct every month. Again, this is a random sample of our membership of 300,000 small business owners. The second Tuesday of every month, we release the previous month's data. At six o'clock in the morning—it's very early, yes—but we have been conducting the survey, which is relatively the same questionnaire that's remained intact for 52 years. So we have a lot of data collected. This chart and all these charts roughly denote about a couple hundred thousand small business owners that have responded to this survey over the years.

(02:39):
And this is our headline measure of the health of the small business sector: our small business optimism index. It comprises about 10 questions within our survey, which is roughly about 35 questions, and it covers the grand scale or spectrum of different types of operations. So whether it's inventory, sales expectations, hiring plans, unfilled job openings, capital spending plans, and just their general economic outlook of business conditions and whether it's a good time to expand. For those questions, we have created this index and you can see right now—just to help you navigate—the vertical line is showing the quarterly data versus the monthly data on the right-hand side in 1986. We decided to move this to a monthly survey so we had something current to talk about every month instead of every quarter. And then the horizontal line is the average of the 52-year history of the survey.

(03:50):
You can see that the last data point shows that we're just above the 52-year average of the survey. Small business owners were very optimistic after the election about the promises of Congress and the president about lowering taxes or at least making permanent those tax provisions in TCJA passed in 2017 that were so important, especially the 20% small business deduction and a regulatory environment that is more friendly for them to operate the business. However, soon after the election, we saw a huge drop in our optimism index, and that was mostly contributed by Liberation Day—the tariffs that were very unsettling for a lot of small business owners in not knowing how to navigate or what to expect as far as inflation pressures that they've had to navigate since roughly 2021 or 2022. We've seen a bit of improvement since then with all of those extensions in the tariff trade negotiations and those 90-day pauses, giving them a little bit more time to better understand how these tariffs might impact them and position themselves.

(05:18):
So right now, again, we're a bit above the 52-year average, which is generally a good place for small business owners as far as general optimism. Looking at the outlook for business conditions, again, we could see that huge increase after the election and then the drop off after the announcement of tariffs. We've seen that level off in a smaller band of where small business owners are as far as their assessment of business conditions in the next six months; it looks similar to the first Trump administration from 2016 to 2020. "Good time to expand"—this has been an interesting question because during COVID, we saw the percent saying that it is a good time to expand at levels that we saw back during the financial crisis and the slow economic expansion afterwards. However, it was a bit different.

(06:21):
Small businesses were doing okay. Consumer spending and business-to-business spending was fairly healthy. However, when it came to trying to find workers or applicants for those open positions, hiring plans, inflation pressures, and supply chain disruptions—instead of having economic conditions not be supportive of expansion opportunities, this time they were saying that there were a lot of constraints in being able to expand their business, especially when it came to the labor market. It is still a tight labor market for many small business owners. It was pretty universal at the beginning after COVID and the great reshuffling of their workers, but right now it's a bit more industry-specific. So, they are still struggling with "good time to expand." We're nowhere near where we were pre-COVID. Sales expectations: this is an area where after the election, there was a huge increase in expected sales, which dropped off again related to tariffs. Whether that was going to impact them or whether they were anticipating that impacting consumer spending, this was an area of concern.

(07:39):
There is a lot of uncertainty related to tariffs or immigration policy and how that's going to impact their business. We're inching back up to where we've been for that 52-year history across time. Looking at inflation, this has been one of their dominant issues over the last few years, and we've seen price increases decline. This is a net percent of those saying that they increased prices versus decreased prices. The net percent saying increased prices has leveled off quite a bit from where we were in 2022. However, it's still fairly above the average over the history of the survey. We're not to where we were back in the 70s and 80s, but it is still a very uncomfortable position for many small business owners. Again, while it was fairly widespread across industries before, it is now concentrated in certain industry groups.

(08:47):
Price plans are basically the same look here in that we have elevated levels that are still anticipating having to increase prices in the next three months compared to where they are now. Some of this has to do with inflation; some still has to do with compensation pressure increases. So whether it's labor costs or the cost of inventory and supplies, all are contributing to these questions related to their plans or expectations of increasing prices or what they have done in the last quarter. And then the tight labor market: this is an area that we spend a lot of time talking about, as we still see very elevated levels of small business owners saying that they have a job that they're unable to fill. This is predominantly in construction, transportation, and some manufacturing. Right now, retail is a bit elevated, but that's likely due to seasonal issues running up to the holiday season.

(09:56):
But construction, not surprising, is one of the areas that we see almost half of our members in that industry category saying that they're unable to find those who have the skills for construction. This is something that they've had to deal with pre-COVID, but has exacerbated as a problem after COVID and also because of the immigration policies that are impacting that sector. Hiring plans are back to somewhat normal levels, though a bit elevated. A lot of small business owners are still planning to hire if they can find those applicants to fill those open positions. Looking at single most important problems: inflation is one of the categories included in this question, and that's been the dominant issue for the last number of years. Over about the last eight months, it has declined in importance and labor quality has taken over that top spot.

(11:04):
If you combine labor quality and labor costs, it's 29% that are saying either one of those, mostly in labor quality. But if you add those to look at the employment picture, just under a third are saying that labor in some configuration is their most important problem or significant problem in operating their business. The employment situation is still a very huge concern for small business owners in being able to fill that very elevated level of job openings. Compensation changes: small business owners are in a challenging situation right now in trying to retain and recruit employees for those open positions. In general, they likely have a more difficult time than their larger counterparts because of their inability to afford, say, health insurance. So while wages are competitive, the benefit side of their compensation packages and being competitive in that space is a challenge.

(12:14):
We're seeing a leveling off of the percent of small employers offering health insurance. It's been in decline for at least 25 years, and we have seen a bit of a plateau there, so that's a good sign, but health insurance is still one of their more concerning costs. Those newer businesses that might have otherwise offered the benefit are delaying offering the benefit until they feel more secure in taking on those financial responsibilities. Also, those who are offering the benefit are having to adjust the cost-sharing parameters with their employees. However, because they're small businesses and they don't have many employees, they certainly need to be competitive, at least for their employees taking up health insurance so that they can get the offer from the insurance company and be covered. Compensation plans going forward are still elevated, but we are looking at more average levels in this question also.

(13:23):
I wanted to stop with this one. Looking at inflation, again, that's decreased or declined notably over the last number of years. One of the selections is financing costs. While that's elevated, it is one of the areas that isn't quite as concerning. However, this question is, "What is your single most important problem?" So while it's not the single most important problem, it is likely a problem of concern to many small business owners. In that last year, we surveyed a random sample of our membership on small business problems and priorities, and we list 75 potential problems in them operating their business. Interest rates is one of the issues and from four years prior—the previous iteration of that publication was in 2020—interest rates ranked number 56. People evaluate each possible issue and we rank them by their mean score on a Likert scale.

(14:40):
So interest rates in 2020 ranked 56, not a problem for most folks. Even accessing long and short-term loans, they were, I believe, number 70 and 71 as far as the critical nature of the issue. In 2024, interest rates ranked 13; 22% said it was a significant issue in operating their business. Accessing financing for those businesses that are more mature and have been around longer—that's generally the scope of our membership, those businesses that are over 10 years old—their ability to access financing isn't generally a top concern for them. However, interest rates and financing costs are and have been elevated. It is certainly still a concern that we hear about. And then: uncertainty. A number of years ago, we created an uncertainty index. This is of six questions within our survey where the responses of "I don't know" or "I'm uncertain" are compiled into this index.

(15:57):
As you can see, we're still at a very high level of uncertainty for small business owners. What does this mean? They don't know how to move forward or they're unsure and don't feel comfortable moving forward with big investment plans, increasing employment, or decreasing employment. As of the last few months, we've seen the questions within this uncertainty index—where more were in the "I'm certain it's bad" category—moving to "I'm just not sure." That is certainly a better place to be than moving from "I know things are going to get better" to uncertain, but it is still an uncomfortable place for small business owners. So I will leave with that. If you have any questions, I'm happy to take them. Looks like we have about three minutes left. Thank you so much.

(17:07):
If there are no questions, I'm certainly around afterwards. Also, all of our data is publicly available. So if you're interested in looking at any of our survey data, it is available on our website or I'm happy to send it over to you in an Excel sheet. Please contact me; it's holly.wade@nfib.org. Very easy to find me. Thank you so much.