Dive Brief:

• Small business optimism slumped in December amid gloom about prospects for economic growth and sales during the next six months, the National Federation of Independent Business (NFIB) said Tuesday, describing the findings behind its Small Business Optimism Index.
• High inflation persists as the top business problem, NFIB said, noting expectations of recession in 2023. The tight labor market is also a leading challenge, with 41% of business owners reporting difficulty filling job openings and 93% of those hiring or trying to hire unable to find enough qualified workers.
• “Small business owners are not optimistic about 2023 as sales and business conditions are expected to deteriorate, NFIB Chief Economist Bill Dunkelberg said in a statement.

Dive Insight:

The drop in the NFIB’s Optimism Index “is an ominous sign,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

The plunge in gasoline prices during the past six months normally would lift business owners’ sentiments, he said Tuesday. The price of a gallon of gas has fallen 35% since June to $3.27, according to AAA.

“But the hit from higher interest rates and the volatility in the stock market right now are more powerful forces,” pushing down the Optimism Index to levels that have presaged a downturn, Shepherdson said. The index has sagged below its 49-year average during the past 12 months, according to the NFIB.

Federal Reserve policymakers, after increasing the benchmark interest rate by 4.25 percentage points last year, say they plan to continue tightening at their coming meetings in an effort to reduce inflation from near a 40-year high.

“I am committed to taking further actions to bring inflation back down to our goal,” Fed Governor Michelle Bowman said in a speech Tuesday.

“In recent months we’ve seen a decline in some measures of inflation but we have a lot more work to do, so I expect the FOMC will continue raising interest rates to tighten monetary policy, as we stated after our December meeting,” Bowman said.

After additional increases, the federal funds rate will likely need to remain “restrictive” for some time in order to restore price stability, she said.

Rising borrowing costs have not yet fully taken hold in the economy, NFIB said. “The negative impact of the dramatic increase in interest rates has not been fully felt.”

At the same time, small business owners see broad harm from high price pressures, according to NFIB. “Owners continue to call inflation their top business problem, lamenting the cost increases for their inputs (inventory, suppliers, labor, energy, etc.), which compel them to raise their selling prices to cover the costs.”