The corporate health of US small businesses may not be as strong as the headline National Income & Product Accounts (NIPA) corporate profit figures suggest.
The NFIB Small Business Optimism Index corroborates this view. The balance for small business earnings fell from -14 to -17 in October.
Small business earnings have, on this measure at least, been trending lower since the May 2018 peak. This indicator has historically been a very good lead for NIPA corporate profits.
Smaller companies are struggling to find the right workers to boost their productivity and are having to raise prices significantly. The NFIB price plans balance (next three months) surged to 51%. For context, this was higher than the late-70s inflation peak (47%).
Larger companies may have the pricing power to maintain profit margins. But corporate earnings (NIPA) and small business earnings (NFIB) together suggest that small businesses have less room to absorb higher costs.
The higher cost of living is hitting consumers too. According to the New York Fed Survey of Consumer Expectations, the share of respondents who believed their financial situation would be either ‘much worse’ or ‘somewhat’ worse rose to 25.7% in October. This was not far off the peak in April 2020 (31.6%).
In short, these two surveys (NFIB and NY Fed Survey of Consumer Expectations) have a clear message: inflation is becoming a bigger problem for small businesses and consumers.
Summary
- NFIB earnings fall
- Price and compensation plans jump
- Financial situation of households worsening
