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Small Business Problems Resulting in Price Increases

Small Business
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EDITOR NOTE: It’s incredibly challenging to run a small business in the best of times. In 2021, small businesses are facing a perfect storm of growing problems that could cause a mass small business failure. In the “current era of Stimulus Good Times,” these businesses are struggling mightily to find quality workers. In June, 46% of small businesses had job openings yet, even with 13 million Americans claiming unemployment and small businesses raising their compensation packages to an all-time high, companies are still struggling to hire to meet demand. This all coincides with surging supply prices and shrinking inventories. Small businesses are the backbone of the American economy and, if these trends keep up much longer, you could start to see a level of failure in this sector that is a terrible sign for the entire U.S. economy.

Small businesses are tough. Many disappear quietly. Hiring is an issue. Due to the limited resources, small businesses have trouble competing with large corporations in terms of pay, benefits, glitzy workplaces, and LinkedIn glamor. But in the current era of the Stimulus Good Times with its huge kinks, labor issues hit records – the weird phenomenon of 13 million people claiming unemployment compensation while companies are having trouble hiring.

In addition to a slew of labor issues, small businesses face inventory shortages. And they responded to the challenges where everything costs more – including their labor – by raising prices in record numbers, according to data from the NFIB, the largest trade organization in the US for small businesses.

Of the small businesses, 46% reported that they had job openings in June that couldn’t be filled, the second highest in the NFIB’s data going back to 1986, just below the record in May:

Plans to increase employment over the next three months rose to a new record in June. The employment index tracks the percent of owners who plan to “increase” staff minus those who plan to “decrease” staff over the next three months:

Small Business

And they have been raising compensation. In June, the compensation index jumped to an all-time high. The index tracks the net of increases minus decreases over the past three months. It shows that small business owners are straining to add and retain staff:

Small Business

The top problem that owners said their businesses faced was the “quality of labor” they were able to attract.

Over half of the owners said that they get “few or no qualified applicants” for the job openings they have. For small businesses, this issue is always high in hot labor markets, but it’s much less of an issue when then the labor market tanks sending high-quality labor looking for jobs.

The difficulties small businesses have in retaining and adding staff, given the aggressive hiring practices by larger companies that a small business might not be able to compete with, is shown in the index for actual net increases of employment, which has remained slightly negative for the past two months, as these businesses are even having trouble hanging on to their staff:

Small Business

And small businesses have raised their prices over the “past three months” at a pace that spiked far beyond all prior periods in the data going back to 1986. The survey data doesn’t extend back to the high-inflation days of the late 1970s and early 1980s, so we lack that reference. But this is huge:

Small Business

And it’s going to get bigger: A record portion of small businesses are still planning to raise their prices over the “next three months”:

Small Business

Small businesses, more often than not, carry more inventory than they want, and inventory being “too low” is generally not a big issue, according to the NFIB data. But this changed radically in June last year, when this metric began spiking to hit a new all-time record in June this year:

Small Business

Owners of small businesses are feeling fairly optimistic overall, with the NFIB’s Optimism Index at 102. While down from the peak periods of optimism in the 107 range, it’s up a bunch from 91 during the dark days in April 2020, and from 81 during the low of the Financial Crisis in March 2009.

Original post from Wolf Street

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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