Dive Brief:

• The proportion of small business owners expecting brighter conditions for their companies slumped to the lowest level in 48 years, the National Federation of Independent Business (NFIB) said, primarily blaming the worst inflation in four decades.
• Nearly one out of three small businesses (32%) identified rising prices as their biggest problem — the highest reading since late 1980, NFIB said, describing survey results. Companies cited quality of labor and taxes as their second and third most worrisome challenges.
• “Small business owners are struggling to deal with inflation pressures,” NFIB Chief Economist Bill Dunkelberg said. “The labor supply is not responding strongly to small businesses’ high wage offers and the impact of inflation has significantly disrupted business operations."

Dive Insight:

CFOs concerned about the harm from inflation have found support in recent months from the Federal Reserve. The central bank this month reduced stimulus by raising the main interest rate by a half point and announcing plans for trimming its $9 trillion balance sheet.

“Rising inflation, increasing borrowing costs and ongoing geopolitical tensions pose risks to the economic outlook, particularly for businesses that were most affected by the pandemic,” the central bank said in a semi-annual report on financial stability.

Many big companies clawing back from coronavirus lockdowns carry too much debt, the central bank said. Gross leverage, or the ratio of debt to assets, persists at a record level for sectors hit hardest by the pandemic including airlines, restaurants and hospitality.

Accelerating inflation may stymie efforts by small businesses to pay off debt, the Fed said. “Increasing labor costs and prices for other inputs may reduce small firms’ earnings and their ability to service their loans.”

The consumer price index increased 8.5% year-over-year in March while the Fed’s preferred measure of inflation — the core personal consumption expenditures price index — rose 5.2%, according to the Labor Department.

“Inflation has been higher and interest rates have risen more than was expected at the time of the last financial stability report” in November, the Fed said. Since early that month the yield on the benchmark 10-year Treasury note has jumped to 3% from 1.6%.

More “averse surprises in inflation and interest rates” and an economic slowdown could weaken business balance sheets, “leading to an increase in delinquencies, bankruptcies and other forms of financial distress,” the Fed said.

“Business credit quality could be eroded by a steep rise in rates that would increase business borrowing costs, which in turn could have negative consequences on employment and business investment,” the central bank said.

Weakening recovery?

Several economists in recent weeks have also flagged the prospect that growth will falter.

“While inflation remains uppermost in the minds at the Federal Reserve, the ‘R’ word (recession) has increasingly appeared in the prognostications of economists,” the NFIB said. “Predictions have a recession starting as early as the third quarter of this year, although most guesses have 2023 for the start.”

First-quarter growth in gross domestic product slumped to a 1.4% annualized rate from 6.9% in the fourth quarter primarily because of inventory reductions, a waning of fiscal stimulus aimed at offsetting harm from the pandemic and a rise in imports as congestion at U.S. ports began to ease. 

Adding to inflation pressures, small business owners have pushed up wages in an effort to overcome a tight labor market.

Business and government raised employee compensation 4.5% during the first quarter compared with the same period in 2021, a higher increase than the 4% annual growth during the fourth quarter, according to the Labor Department said.

Demand for workers far outstrips supply. Organizations reported 11.3 million job openings in February but only 6.3 million Americans sought work, the Labor Department said.

“Small business owners continue to try to fill their record high levels of job openings but are finding it difficult,” NFIB said. “Labor supply is not responding strongly to their high wage offers.”

“Owners are very pessimistic about sales and business conditions in the second half of the year,” according to NFIB. “This dampens capital investment and, eventually, will feed into employment if sales actually slow as expected.”