Trends and Expectations in America’s Small Business Sector
by Daniel Newman and Vera Chaudhry
The Census Bureau’s Business Trends and Outlook Survey (BTOS) provides regular insights into current small business conditions along with expectations about performance six months into the future. This post highlights some of the major trends and expectations reported by the small business community in July 2023, covering a one-year period since the debut of the survey last summer.
After being weighed down by economic forces for much of last year, the small business sector appears ready to shake it off this summer, as can be seen in improved national economic indicators. Across the United States, more than 33 million small businesses, defined as those with under 500 workers, employ just under half of the country’s workers and inject vital energy into local economies. Even if they aren’t totally out of the woods yet, the increasing possibility of a “soft landing”—in which inflation comes down without a significant increase in unemployment—is providing some optimism to small businesses across the country.
Inflation and supply chain concerns have eased postpandemic-era problems, helping small businesses.
Many small businesses suffered through last year’s cruel summer thanks in part to decades-high inflation and lingering supply chain issues, but those concerns appear to be abating recently. Critically, the cost of doing business is becoming more manageable for both consumers and businesses as inflationary pressures continue to come down. Just 15 percent of small businesses increased the prices they charge customers for goods or services in recent weeks, which is nearly halved from the share reported last year during the inflation surge. At the same time, more than four out of five businesses left prices unchanged in late July, reaching the highest share reported yet in the survey.
On the other side of the ledger, the share of businesses reporting price hikes for the items and services needed as inputs for their operations dropped nearly 25 percentage points since last summer, reaching just 38 percent in the latest figures. In a similarly encouraging sign, more than half of businesses are reporting no increase in costs at all—much improved from last summer when only about one-third indicated stable prices.
The latest survey results should also allay some concerns that continued price increases might become ingrained into the expectations of consumers and businesses. Looking six months into the future, the share of businesses expecting to raise prices has steadily decreased since last summer: just 29 percent indicated they plan to raise prices on the goods or services they provide—a low point in the survey and down significantly from last summer when nearly 45 percent expected to do so. The outlook for input prices has likewise improved, with the share of small businesses anticipating price stability six months in the future rising to half compared with 30 percent last summer.
Supply chain issues are swiftly receding into the rear view mirror as well, with a survey-high 80 percent of small businesses reporting no delays due to suppliers, production, or the ability to get their goods to consumers in a timely manner. This is a stark turnaround from last summer, when 56 percent of respondents reported no such issues.
Hiring remains stubbornly difficult for some small businesses, but concerns are diminishing.
Hiring concerns among small businesses have lessened recently, a trend consistent with a labor market that appears to be stabilizing in a healthy manner after pandemic turbulence. Even so, hiring for some positions remains difficult due to the fact that unemployment is historically low and there is still a very tight job market with more than one job opening for every unemployed worker, a ratio that remains well above levels seen in the years immediately preceding the pandemic. As reported in the June NFIB Small Business Jobs Report, an overwhelming majority of businesses looking to hire employees had difficulty finding qualified applicants—if any applied at all.
Indeed, about 18 percent of small businesses reported some difficulty finding the one they need for the job in recent weeks, a share that has ticked down from over one-quarter last summer. The outlook seems to be improving, though, as the share of businesses concerned about hiring in the future has also dropped 10 percentage points from last summer to 27 percent, roughly equaling those who have no concerns about future hiring.
Summer heat is appearing to take a toll on consumer behavior across several major metro areas.
A large swath of America has a problem with extreme heat this summer, and many businesses have reported a decline in patronage as people seek to avoid time outside. In heated metro areas, larger shares of businesses reported a decrease in consumer demand—and thus revenue—over the course of July relative to other parts of the country. A staggering 40 percent of small businesses in Riverside, CA, reported a fall in sales on average in July when the average high temperature there neared 100 degrees (which is relatively typical for the month). By contrast, only about one-quarter of small businesses in St. Louis and Boston reported a decline in demand over the same period—places where the average high temperature was 10-20 degrees cooler this July.
As many small business owners know all too well, extreme weather can have dire consequences for their operations and even survival. Heat in particular is increasingly becoming a business concern, even in large, dynamic economies like Houston, where residents are opting to remain indoors due to extreme temperatures. In tourism-dependent communities, weather-related economic effects can be devastating, as visitors cancel plans and a limited supply of workers can make rebuilding highly expensive—problems that communities across Vermont have recently found in the wake of intense flooding this summer. At least in the near term, labor shortages and price increases will impede small businesses’ recovery in communities affected by such extreme weather events.
As businesses enter their postpandemic era, many expect relative stability in the coming months.
A healthy and stable small business sector remains essential to a strong U.S. economy, and current sentiment provides encouraging evidence that it is on firm ground. The national small business landscape appears to be stabilizing into what is considered normal operating conditions, with an increasing share of business owners reporting “average” performance over the course of this year. The increase largely came from fewer businesses claiming “excellent” or “above average” performance, suggesting that what may have been impressive a year ago is now the norm. At the same time, the share reporting “below average” or “poor” conditions has remained steady over the past year, hovering around one-fifth of survey respondents.
Despite increasing interest rates and tightening lending standards that make it more expensive and more difficult to take out loans, there are promising signs that the small business sector increasingly expects steady economic conditions for the foreseeable future. Just over two-thirds of respondents expect that demand for their goods and services will remain strong through the end of the year—up nearly 10 percentage points from last summer.
Overall performance varies across industry sectors, however, and improvement in overall conditions has been strongest in the accommodation and food services sector, where those reporting “below average” or “poor” conditions shrank by 5 percentage points from 28 to 23 percent. By contrast, large companies in the tech sector have gone through several rounds of layoffs over the past year, apparently affecting the overall performance of businesses in the information sector downstream in smaller firms. Those businesses reported a modest increase in overall negative conditions, rising from 24 to 29 percent between July 2022 and July 2023. The real estate sector also appears to be feeling the pressure of increased interest rates that has cooled the housing market in many places. While the sector reported just 15 percent with poor or below average conditions last summer—the lowest share among sectors at the time—that has increased to 23 percent this July, which is now slightly higher than the typical sector.