The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the 4th quarter of 1973 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The report is released on the second Tuesday of each month. This survey was conducted in May 2021.

Small Business Optimism Index

May 2021 Report:
Nearly Half of Small Businesses Unable to Fill Job Openings


A record-high 48% of small business owners in May reported unfilled job openings (seasonally adjusted), according to NFIB’s monthly jobs report. May is the fourth consecutive month of record-high readings for unfilled job openings and is 26 points higher than the 48-year historical reading of 22%.

“Small business owners are struggling at record levels trying to get workers back in open positions,” said NFIB Chief Economist Bill Dunkelberg. “Owners are offering higher wages to try to remedy the labor shortage problem. Ultimately, higher labor costs are being passed on to customers in higher selling prices.”

Sixty-one percent of owners reporting hiring or trying to hire in May. Owners have plans to fill open positions with a seasonally adjusted net 27% planning to create new jobs in the next three months.

A net 34% of owners (seasonally adjusted) reported raising compensation, the highest level in the past 12 months. A net 22% of owners plan to raise compensation in the next three months, up two points from April.

Small business owners continue to report finding qualified employees remains a problem with 93% of owners hiring or trying to hire reported few or no “qualified” applications for the positions they were trying to fill in May. Thirty-two percent of owners reported few qualified applicants for their positions and 25% reported none.

Eight percent of owners cited labor costs as their top business problem and 26% said that labor quality was their top business problem, the top business concern.

Forty percent of small business owners have job openings for skilled workers and 27% have openings for unskilled labor. In the construction industry, 51% of job openings are for skilled workers. Sixty-six percent of construction businesses reported few or no qualified applicants.

 

 

LABOR MARKETS 


Strong job growth eased in May as small businesses struggled to find workers to fill open positions as unfilled job openings increased from 44 percent to 48 percent, seasonally adjusted. May is the fourth consecutive month setting a new record high reading for unfilled job openings. May’s reading is 26 points higher than the 48-year historical average of 22 percent. Forty percent have openings for skilled workers (up 3 points) and 27 percent have openings for unskilled labor (up 7 points). The increase in unfilled openings was accompanied by a 2- point increase in the percent that reported hiring or trying to hire in May, 61 percent. Owners have plans to fill open positions, with a seasonally adjusted net 27 percent planning to create new jobs in the next three months, sharply up 6 points from April. Finding qualified employees remains a problem. Fifty-seven percent (93 percent of those hiring or trying to hire) of owners reported few or no “qualified” applicants for the positions they were trying to fill in May (up 3 points). Where there are open positions, labor quality remains a significant problem. Thirty-two percent of owners reported few qualified applicants for their open positions (up 1 point) and 25 percent reported none (up 2 points). The labor shortage remains the top problem facing owners.

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CAPITAL SPENDING


Fifty-nine percent reported capital outlays in the last six months, up 2 points from April. This takes spending back into the range experienced for the last few years which was the best capital investment period in recent history. Of those making expenditures, 44 percent reported spending on new equipment (up 2 points), 24 percent acquired vehicles (down 1 point), and 16 percent improved or expanded facilities (up 1 point). Six percent acquired new buildings or land for expansion (unchanged) and 13 percent spent money for new fixtures and furniture (up 1 point). Twenty-seven percent plan capital outlays in the next few months, unchanged from April. Historically high numbers of owners are not optimistic about economic conditions or real sales in the second half, and this will not encourage more investment and expansion. Capital spending is critical to the improvement of worker productivity and compensation.

COMPENSATION AND EARNINGS


Seasonally adjusted, a net 34 percent reported raising compensation (up 3 points), the highest level in the past 12 months. Raising compensation is about the only way owners have to remedy the labor shortage problem. A net 22 percent plan to raise compensation in the next three months, up 2 points. Eight percent cited labor costs as their top business problem and 26 percent said that labor quality was their top business problem, the top business concern. The frequency of reports of positive profit trends declined 4 points to a net negative 11 percent. Among owners reporting lower profits, 38 percent blamed weaker sales, 17 percent cited a rise in the cost of materials, 12 percent cited the usual seasonal change, 8 percent cited labor costs, 7 percent cited lower prices, and 6 percent cited higher taxes or regulatory costs. For owners reporting higher profits, 60 percent credited sales volumes, 18 percent cited usual seasonal change, and 14 percent cited higher prices.

CREDIT MARKETS 


Three percent of owners reported that all their borrowing needs were not satisfied (up 1 point). Twenty-three percent reported all credit needs met (down 3 points) and 62 percent said they were not interested in a loan (up 3 points). A net 2 percent reported their last loan was harder to get than in previous attempts (down 1 point). One percent reported that financing was their top business problem. The net percent of owners reporting paying a higher rate on their most recent loan was 1 percent. The average rate paid on short maturity loans was 4.9 percent. Twenty-three percent of all owners reported borrowing on a regular basis (down 1 point).

SALES AND INVENTORIES


A net 7 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, up 4 points from April and marking a return to the pre-Covid sales activity. The net percent of owners expecting higher real sales volumes improved 2 points to a net 3 percent. This is an improvement but, historically, still weak. The net percent of owners reporting inventory increases rose 1 point to a net negative 1 percent. The problem is a good one – owners are selling stuff faster than they can replace the inventory. However, owners don’t expect that to continue into the second half of the year. A net 8 percent of owners view current inventory stocks as “too low” in May, up 1 point from April and at historically high levels. A net 6 percent of owners plan inventory investment in the coming months, up 1 point.

INFLATION


The net percent of owners raising average selling prices increased 4 points to a net 40 percent, seasonally adjusted, the highest reading since April 1981. This is inflation on Main Street which means its inflation for the whole economy. The inflation spike is likely temporary according to the Fed but is being closely watched. Unadjusted, 5 percent (down 1 point) reported lower average selling prices and 48 percent (up 3 points) reported higher average prices. Price hikes were most frequent in wholesale (65 percent higher, 2 percent lower), retail (53 percent higher, 5 percent lower), and manufacturing (47 percent higher, 1 percent lower). Seasonally adjusted, a net 43 percent plan price hikes (up 7 points).

COMMENTARY


Two headlines in the bigger picture: Labor is in short supply and holding back growth, and Inflation is rampant on Main Street. The Federal Reserve is clinging to its insistence that inflation be allowed to run over 2 percent for a considerable amount of time to produce an average inflation rate of 2 percent (inflation has been below 2% for years). Yikes! Consumers didn’t mind low inflation at all. That will likely force the Federal Reserve to allow interest rates to rise to offset the depreciation caused by inflation and protect lenders (savers) who get repaid in the future when prices are higher.

Owners are passing on higher operating costs and wages much as they did in 2008 when oil was $140/bb. Today, oil is about $70/bbl and energy costs aren’t a major problem yet. But owners are finding that they must raise labor compensation to keep workers and attract new ones. This cost is being passed on in higher prices along with other costs due to supply chain problems, trade issues, and Covid-19 disruptions.

The second quarter will likely not repeat the first, but growth will still be historically strong as consumers spend the money being funneled to them by the government and through increased compensation. Consumers have a trillion or two of savings piled up and ready to go. But neither consumers or business owners are exuberant about economic prospects for the rest of the year. There is much uncertainty, about Covid, about economic policy (taxes, regulations, etc.) and politics, globally and domestically.

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