What about US small businesses in early 2023?

It has been some time since this column last reviewed available data on the state of small businesses in the United States. Now a new year is underway, a new Congress has been convened, legislative sessions are in full swing across the country, and the 2024 presidential race has begun. What should policymakers in Washington and state capitals know about how small businesses say they are doing? Several recent surveys and data releases provide insight. (Huge HT: Tom Sullivan.)

Top lines: hiring challenges, diverse outlook

Five different surveys published in January and February show that small businesses agree that as they try to hire, they experience constant difficulty filling vacancies. However, small business owners are less united in these surveys when it comes to confidence and prospects. The five surveys conducted here are:

A short appendix at the bottom of this column provides a rough comparison of the surveys in terms of sample size and types of companies surveyed.

Small business confidence can be stable — or rising — or falling

The general confidence indices in these surveys should not be overanalyzed. More interesting are the components of each and the decisions small businesses say they make and why. But reliability measurements can provide a quick temperature check of how small businesses think they’re doing. As the headline suggests, the surveys seem to point in different directions.

The WSJ/Vistage Small Business CEO Confidence Index was “stable” in January, staying close to the highest level of the previous six months. Meanwhile, there was a small increase (two points) in the CNBC|SurveyMonkey Small Business Confidence Index.

In stark contrast, the NFIB Small Business Optimism Index has been on a steady downward trend since late 2019. Much of that deterioration appears to have been driven by what NFIB calls the index’s “soft” components, such as expected credit conditions and growth prospects. The ‘hard’ components, such as vacancies and income, have also fallen, but not nearly as much. As the NFIB commentary in the report notes, “Without the Job Opportunities and Hiring Plans components, the Index would be much lower. … Everything else is pretty much in the tank.

It would be interesting to look at the lagging relationship between the hard and soft components: does a decrease in the soft components (mostly stated intentions) predict a decrease in the hard components (mostly revealed actions)? A glance at the chart indicates that this could be the case, but a more rigorous analysis would be required. For what it’s worth, Michael Cembalest at JP Morgan quotes NFIB’s “composite demand versus labor costs” as a leading indicator. Currently, says Cembalest, it “points to more downsides ahead” in terms of S&P 500 net margin.

Hiring: We (think we) want employees

In four out of five surveys, a majority of small business respondents say they hire people. (The exception is CNBC|SurveyMonkey, which doesn’t quite ask the same question; only 23% of that survey expect the number of full-time workers to increase in the next 12 months.) discovered, but hiring issues continue to plague small businesses.

The Alignable survey showed the strongest increase in hiring, a monthly gain of eight percentage points. Compared to the end of 2022, there were strong increases in hiring plans for both full-time and part-time employees. Similarly, the share in the NFIB survey saying people are hiring in January has increased compared to December. The balance of respondents in the NFIB survey indicates that more small businesses plan to hire staff in the short term. In contrast, net hiring plans in the WSJ/Vistage survey declined month over month.

Of the small businesses that participated in the 10KSBV survey, 82% said it is difficult to find and recruit qualified candidates. According to the respondents of the 10KSBV survey, the difficulty of finding and retaining qualified employees surpassed inflation by 12 points as their main problem.

An even higher percentage of those actively hiring in the NFIB survey, 91%, said they had few or no qualified applicants for open positions. The percentage of NFIB respondents who say job openings are difficult to fill remains “historically very high,” the commentary said. A consistent share of small businesses in the CNBC|SurveyMonkey survey have cited hiring issues. In each quarter of the past two years of that survey, about half of small business owners say it’s becoming increasingly difficult to hire employees.

However, according to the WSJ/Vistage survey, “small businesses are finding it increasingly easier to find talent.” A higher share of respondents said they found it easier to fill vacancies now than they did a year ago – and since November that’s up 15 percentage points drop in the share that said recruitment issues affected their ability to work at full capacity. In other words, they adapt. There may be a similar easing of difficulty in hiring respondents in the Alignable survey. There, while 51% said it is difficult “to find and hire well-qualified workers,” that was down from 65% at the end of 2022.

Soaring hope or stubborn optimism?

A consistent theme in nearly all small business surveys over time is that despite the lack of confidence small business owners may express in the overall economic direction, they remain optimistic about their own prospects. How could it be otherwise?

In the WSJ/Vistage survey, 60% expect “increased revenue” over the next 12 months. A smaller share, 47%, expected improved profitability for their company, but that is the “highest level in nine months”. A higher share (60%) of the 10KSBV survey expect improved profitability this year, and nearly 70% are optimistic about their company’s financial trajectory this year.

However, less optimism can be seen in the NFIB study; the net percentage of respondents expecting higher versus lower sales in the next three months fell from December to January and is at its lowest level since last August. The question in the NFIB survey does refer to a shorter time frame than in other surveys (three months compared to 12 months).

Perhaps the biggest concern is that the share of small businesses in the NFIB survey planning capital expenditures over the next three to six months has steadily declined and is at its lowest level (21%) since March 2021.

What do these studies tell us?

The hiring issue continues to pose a dilemma for the Federal Reserve, economists and others. Unemployment remains historically low and monthly job creation has been strong. Part of the problem is that labor force participation has not fully recovered and has been declining for years. That may account for the research findings regarding hiring problems in small businesses. Yet researchers have also found that many employees have reduced their hours worked. It doesn’t seem like the small business surveys asked for this, but maybe they should: Do employees, at any level, work fewer hours in your company today than they did a year ago, voluntarily or involuntarily?

The differences between small business surveys may also be due to differences in samples or between economic sectors. There is some indication of this in Alignable’s publicly reported results, with significant cross-industry differences in hirings and layoffs. Seasonal fluctuations can also play a role – it would be good to know how these affect the research results. In general, it takes a little deeper analysis, as mentioned above, to fully understand how concerned or how encouraged we should be by these studies.

Appendix: Populations of Respondents

Survey comparisons should always account for differences in methodology, sample size, sample composition, and more. Not all relevant information is available from these surveys, but a brief overview is provided below.

WSJ/Vistage

• n=534 “CEOs and Small Business Leaders”
• 41% of respondents have between 20 and 49 employees
• 39% have between $10 and $20 million in annual revenue

10KSBV

• N=1,838 Goldman Sachs 10,000 Small Businesses Program participants
• Most have fewer than 20 employees

NFIB

• N=1,466 “owner/members” of NFIB
• The majority have fewer than 10 employees

Alignable

• N=3,846 “randomly selected small business owners”

CNBC|SurveyMonkey

• N=2,371 “self-identified small business owners”
• 78% have less than 10 employees