The Index of Small Business Optimism fell 0.3 points in May to 90.9. This month marks the third monthly decline in a row. The proximate cause is the fact that 1 in 4 owners still report weak sales as their top business problem. Consumer spending is weak, especially for “services,” a sector dominated by small businesses. the index makes clear that optimism is moving in the wrong direction: a recession-level reading for an economy fighting its way through a recovery. Also, inflation is a growing concern now with 1 in 10 citing this as their most serious business problem meaning cost side pressures coming in the “back door,” not rising food prices at home.
Inflation is showing its face on Main Street. For 25 months, more owners reported cutting average selling prices than raising them. In February, this changed, with a net 5 percent reporting raising average selling prices. This has increased to 15 percent in May, a gain of 39 percentage points from the low reading in 2009 and 26 points higher than last September.
The massive inventory reduction was primarily responsible for the dramatic decline in prices, but that is pretty much over as owners report “balance” in their inventory stocks. About as many owners now report stocks “too low” as report inventories “too high. Plans to raise prices fell 1 point to a net seasonally adjusted 23 percent of owners, the second highest reading in 31 months. In March 2009, the reading was a net 0 percent. The NFIB model now anticipates a stronger push on the core inflation measures, especially since rents are rising which reduces the ability of the imputation for owner inflation to offset the price increases being posted on Main Street.