Dom’s Quick Take: NFIB Survey Points at Risks of Renewed Wage and Price Pressures

In this note, I extract a few key charts from the NFIB (small business association) survey.   Overall, the survey suggests a risk that small businesses could be about to start reversing the recent disinflation.

Hard Data Shows Economic Rebound

Like most surveys, the NFIB shows a marked difference between hard (e.g., actual capex plan) and soft (opinions) data. Chart 1 breaks down the optimism index between hard and soft components, using the NFIB classification. It shows:

• The NFIB optimism index follows the soft data much more than the hard data.
• The hard data index shows a rebound since end-2022.
• The hard data index tracks well the ISM services PMI that also shows a rebound.

No Evidence of a Credit Crunch

Despite the banking crisis earlier this year, respondents report improvements in loan availability and the net share of respondents reporting that their credit needs are satisfied is the same as in 2021 (Chart 2). This could reflect that SME have limited ability or willingness to borrow.

Respondents report paying higher interest rates, although since April 2023 the share of respondents reporting rising interest rates has fallen (Chart 3). This could indicate new issues in the transmission of monetary tightening.

Small Firms Could Be Planning Price Increases

The share of survey respondents reporting planned or actual price increases peaked in Q1 2022 (Chart 4). Since April 2023, the share of respondents planning price increase has rebounded. Historically, the planned series has led the actual series by one to three months, so we should find out soon whether small firms will follow through. If this is the case, consumer price inflation could rebound.

Small Firms Still Face a Tight Labour Market

The survey employment data is mixed (Chart 5). The share of respondents reporting increased actual employment is increasing, though very slowly. At the same time, the share of respondents reporting that they plan to hire more workers is falling. This is in line with reduced labour supply, as all the workers sidelined by the pandemic have now returned to the labour force and employment is now constrained by labour supply.

Indicators that reflect the balance between labour demand and supply, rather than labour demand, namely the number of quality applicants or the difficulty in filling job openings are as strong or stronger than before the pandemic.

Labour market tightness could explain the sharp increase in the share of respondents planning wage increases in the August survey, though the data is volatile, and I do not want to put too much weight on a single data point (Chart 6).

Businesses’ Most Important Problems: Inflation and Quality of Labour

Small businesses’ views on their single most important problem confirm they are not constrained by credit availability or demand for their products. Rather, they report being constrained by the quality of labour and inflation. Some of the firms that report not being able to find quality labour could be really saying that they are not willing or able to pay up to secure the quality of labour they desire.

The share of respondents reporting that competition with big business is their biggest problem has fallen since 2021, possibly due to the Biden administration’s stronger competition policies.

Conclusion

There are emerging signs that small firms could be about to raise prices again and of wage growth. This would be consistent with strong growth and therefore strong demand for their products. In turn, this is raising firms’ demand for quality labour and giving them scope to increase prices and wages. 

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Photo Credit: depositphotos.com

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