As the year draws to a close, so does the economy. The Fed’s weekly economic index has fallen almost steadily since May 2020 and is now at its lowest level since then. The NFIB’s Small Business Optimism Index took a plunge in December 2020 and now stands at 92.1, well below the 49-year average of 98.3. So far, the monthly average is 92.8, with 3 months to go before 2022. Based on its history, this has been a year of recessive readings.
NFIB Small Business Optimism Index
Selling existing homes and starting new homes have created a crater (Census), important segments of the economy linked to many other sectors. In the NFIB’s September SBET survey, more small businesses reported a job reduction (14%) than an increase (10%) and JOLTS reported a loss of 1 million job openings in August. Openings will decrease before jobs are actually cut.
Meanwhile, inflation shows little sign of slowing and remains the biggest problem for nearly a third of small businesses (30%). Oil prices have fallen, but other costs, especially in the service sector, have risen. And services are labor intensive, so these prices are especially sensitive to labor costs that show little tendency to fall. Union activity among small businesses has increased, making it more difficult for owners to control labor costs.
Changes in prices and wages
President Biden’s continued release of oil from the Strategic Petroleum Reserve is an acknowledgment that current energy policies have contributed to the rise in energy prices, kick-starting our current inflationary route. Biden rightly argues that the release will lower oil and energy prices by increasing the global supply of oil for the coming months. However, this will not solve the deficit in the longer term. High energy costs remain a problem.
Owners continue to report increasing workers’ compensation at historically record high rates, indicating that part of the economy is still on fire and the fire is out of control as higher labor costs are being passed on in higher selling prices. The most recent survey from NFIB’s Small Business Economic Trends found that 45% of small business owners increased employee payroll, while 23% planned to increase it. The survey indicated some moderation, but one observation does not make a downward trend a trend of declines.
In general, companies are not positive about future growth, with 8 out of 10 index components weak, some very weak. High vacancies and strong hiring plans are the only components preventing a more serious dip in the Index. If they fade in the coming months, the Index will confirm that we are in a recession.