Small Biz Barometer Broken? Confidence Crashes, Raising Concerns for Consumer Spending

Based on growing fears about inflation, U.S. small-business confidence fell to its lowest level in almost 11 years in March, according to a poll released on Tuesday.

Impact of Declining Small Business Optimism on Economic Indicators

The Small Business Optimism Index of the National Federation of Independent Business (NFIB) dropped 0.9 points to 88.5 last month, the lowest since December 2012. For the 27th consecutive month, the indicator fell short of the 98-year average.

Due to increased labor and material expenses, 25% of owners stated that inflation is their top concern while running their company, an increase of 2% from February. From the previous month, the percentage of companies increasing their average selling prices increased by 7 points.

This corresponds with an increase in consumer prices over the first two months of the current year. The banking, retail, construction, wholesale, and transportation industries all saw price hikes. Additionally, a higher percentage of companies are increasing wages despite a decline in the labor market.

The NFIB said this week that small firms' hiring intentions in March were at their lowest point since May 2020.

However, there is a severe lack of labor, both skilled and unskilled, for small firms in the transportation, construction, and service sectors.

The unemployment rate decreased to 3.8% from 3.9% in February, according to data released by the government last week, and the economy added 303,000 jobs in March.

According to a Reuters poll of experts, the consumer price index is predicted to show growth of 0.3% in March following a 0.4% advance in February on Wednesday. It is anticipated that the CPI grew 3.4% annually in March following a 3.2% increase in February. There is still more inflation than the Federal Reserve's 2% objective.

Although the exact date is unknown, the US Federal Reserve is anticipated to begin reducing interest rates this year. Since July, the Fed has maintained its policy rate between 5.25% and 5.50%. Since March 2022, it has increased the benchmark overnight interest rate by 525 basis points.

How It Affects Consumer Spending

When small-business sentiment weakens, it can lead to various repercussions that ultimately impact consumer spending in several ways:

• Decreased Employment Opportunities: Small businesses may reduce hiring or even lay off employees in response to deteriorating sentiment. This can result in higher unemployment rates and reduced household incomes, which in turn constrain consumer spending as individuals become more cautious about their discretionary purchases.
• Reduced Business Investments: When small businesses are less optimistic about the economic outlook, they may scale back on investments in equipment, inventory, and expansion projects. This reduction in business investment can have a ripple effect across the supply chain, leading to lower demand for goods and services from other businesses, which can ultimately dampen consumer spending.
• Cautious Consumer Behavior: Heightened economic uncertainty stemming from weak small-business sentiment can translate into cautious consumer behavior. Consumers may delay making large purchases, such as homes, cars, or durable goods, and instead focus on saving or paying down debt. This conservative approach to spending can further exacerbate the economic slowdown.
• Impact on Confidence: Small-business sentiment serves as an important indicator of overall economic confidence. When sentiment declines, it can erode consumer confidence in the economy's prospects, leading individuals to adopt a more pessimistic outlook. Reduced consumer confidence tends to correlate with lower levels of spending as consumers become more risk-averse and hesitant to make discretionary purchases.
• Local Economic Effects: Small businesses often have a significant presence in local communities, and their performance can directly impact the economic vitality of those areas. A decline in small-business sentiment may lead to a slowdown in economic activity at the local level, affecting consumer spending patterns within those communities.
• Credit Availability: Small businesses rely on access to credit for financing their operations and expansion plans. A deterioration in sentiment may make lenders more cautious about extending credit to small businesses, which can limit their ability to invest, hire, and innovate. Tighter credit conditions can indirectly impact consumer spending by constraining businesses' ability to offer competitive prices and services.