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Small business confidence has fallen to an all-time low as the majority of Main Street expects runaway inflation and a Federal Reserve unable to bring about a soft landing for the economy, leading to declines in sales and layoffs across all sectors.
The majority of small business owners (57%) taking part in the CNBC/SurveyMonkey Small Business Survey for Q3 2022 believe the recession has already begun, while another 14% predict a recession before the end of the year.
The CNBC/SurveyMonkey online survey was conducted July 25-31, 2022 among a national sample of 2,557 self-identified small business owners.
Main Street pessimism is more widespread than the general population, according to the survey, which included a companion survey of nearly 12,000 non-business owners. 45% of this group believe the US economy has entered a recession.
CNBC|SurveyMonkey data is consistent with other small business community surveys.
“The outlook for business conditions in our monthly survey has deteriorated quite a bit since the beginning of the year,” Holly Wade, executive director of research at the National Federation of Independent Business, said Wednesday at CNBC’s Small Business Playbook Virtual Summit.
While inflation in input costs, energy prices and labor has been a major concern for small business owners throughout the year, its dominance in the minds of entrepreneurs continues to increase. According to the Q3 survey, 43% of small business owners say inflation is the top risk facing their business right now, up from last quarter when it was 38% and the highest it has been in the last four survey quarters has reached .
“It has certainly increased since the beginning of the year, and most see no end in sight or resolution to this problem,” Wade said.
More than three quarters (77%) of the small business owners surveyed expect prices to continue to rise. And while many large companies continue to pass price increases on to customers and report healthy profits, only 13% of small companies say now is a good time to raise prices.
“Their primary tool in dealing with inflation, these higher input costs, is passing those costs on to the customer. Unfortunately, they are often unable to do so immediately. So that’s really hurting cash flow and revenue. Managing cash flow is really difficult and it’s affecting the bottom line,” Wade said.
Only a minority of small business owners (26%) trust the Federal Reserve to be successful in fighting inflation, a result consistent with Q2 survey results.
The Fed has continued to announce inflation as its top priority and that interest rates will continue to rise until it gets prices under control, but Fed leaders, including Chairman Jerome Powell, have said they don’t think the economy is recovering is in recession.
“We are not currently in a recession. … To a certain extent, a recession is in the eye of the beholder,” St. Louis Fed President James Bullard told CNBC on Wednesday.
GDP has been negative for two consecutive quarters, a historic indicator of recession, but by some measures the US economy is proving resilient. While major department stores have been hit hard by changing consumer behavior, overall consumer spending is still high. The job market is strong, unemployment is low and recent macroeconomic data have further bolstered belief that a recession can be avoided. The ISM Non-Manufacturing Purchasing Managers’ Index released on Wednesday showed a surprise recovery. The stock market, on the other hand, just had its best month since 2020.
Economists say that like consumer sentiment, small business sentiment is reactive rather than based on longer-term forecasts, and this can lead to larger, shorter-term shifts in sentiment. The current view of the recession on Main Street, as captured by the Small Business Survey, differs significantly from the Fed’s view. But the details that make up the core confidence index reflect more broadly the economic slowdown the Fed is trying to enact, which more optimistic economists are calling a soft landing.
According to SurveyMonkey, which conducts the survey for CNBC, almost every index component deteriorated quarter over quarter, but the confidence indicator that’s emerging most prominently this quarter is a weaker sell outlook for Main Street. As the Fed seeks to cool demand across the economy with higher interest rates, over a quarter (28%) of small business owners expect their earnings to fall over the next 12 months, up from 21% last quarter. This was the biggest swing factor in the overall confidence index, which hit an all-time low in the third quarter.
More small businesses are also anticipating downsizing next year, up from 14% to 18% sequentially.
The percentage of small business owners who describe business conditions as good (33%) fell again from 36% in the second quarter of 2022. Just over half (51%) of small business owners say the economy is “bad,” up from 44% last quarter.
Almost three-quarters (74%) expect higher interest rates to negatively impact their business.
The confidence index score was 42 out of 100, up from 46 in the second quarter. The previous low was a reading of 43 in the first quarter of the Biden administration.
Wade said that although many small business owners in the NFIB survey don’t believe the recession has begun, they do anticipate economic headwinds. “We’ve seen a drop in those expecting higher sales in the next quarter,” she said.
But for now, she said, employment and sales in the small business sector “hold up”.
partisan politics and economy
The small business demographic is conservative and the confidence index reflects some partisan sentiment and persistent gaps in policy-based survey responses. For example, 69% of Republican small business owners believe the economy is in recession, compared to 34% of Democrats polled. This gap is even wider when small business owners describe the economy, with 68% of Republicans using the word “poor” compared to 19% of Democrats.
Even more troubling to President Joe Biden, however, is the sizable percentage of small business owners who identify as Democrats and believe inflation will continue to rise. While that number is 89% for Republicans and the party divide is wide, more than half of Democrats (51%) agree.
President Biden’s approval rating on Main Street hit the lowest level of his administration, with 31% of small business owners agreeing with how he has handled the president’s work.
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While 81% of small business owners who are Democrats approve of Biden, during this time of high inflation, pollsters have found that Presidents expect support from the vast majority of their party, often over 90%. And as this year’s CNBC/SurveyMonkey Small Business Survey showed, Biden’s approval rating will not improve unless inflation falls. Biden’s approval rating among key swing voters who identify as independents is 29%.
Only 9% of Republicans approve of Biden’s handling of the presidency.
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