PNC survey shows record small business optimism

2021 Fall Economic Outlook rides momentum from vaccines, pandemic-adapted operations.
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Business owners are feeling optimistic about the near-term future of their businesses amid increasing vaccination rates, and those who report that more than three-quarters of their workforce has been vaccinated are the most positive about their business outlook.

This includes expectations for higher demand, sales and profits than companies reporting a lower rate of employee vaccination, according to PNC’s semiannual national small business survey, which was conducted Aug. 2-31.

The PNC Fall Economic Outlook survey was conducted by telephone among small and mid-sized businesses with self-reported revenue of $100,000 to $250 million. Five hundred interviews were conducted nationally by the research and consulting firm Artemis Strategy Group.

Data gathered during the survey show vaccines are top-of-mind for business owners. Eight in 10 (79%) businesses said they have taken action to encourage employee vaccination. Nearly half (48%) are requiring employee vaccinations, 44% are providing assistance related to vaccinations (time off and/or education about vaccination), 26% are incentivizing employees to receive vaccinations, and 24% have added restrictions for employees who choose not to be vaccinated. 

Those efforts may well be making an impact: 78% of survey respondents estimate most of their employees have been vaccinated, and 43% believe their entire workforce is vaccinated.

More than half (53%) of business leaders with fewer than 100 full-time employees have required their employees to receive the vaccine, more than double that of businesses with 100 or more full-time employees (26%).

“The survey results demonstrate that most business owners believe the vaccine can have a positive impact on their businesses,” said Gus Faucher, PNC chief economist. “Further, business owner optimism rises as vaccination rates increase, indicating that efforts to support vaccinations broadly could strengthen the economic recovery.”

Labor shortages, inflation

Despite the optimism among business owners, challenges remain. While more employers hope to hire — and hiring expectations have returned to pre-pandemic levels — many businesses are struggling to find employees. Among all employers surveyed, labor availability is the most frequently mentioned concern, topping sales and supply chain worries that were reported as more prominent earlier in the year. More than four in 10 employers say they are offering increased compensation to retain or attract new employees, implementing employee health or safety improvements (46%) and allowing more flexible work arrangements (44%).

Bill Adams. Courtesy PNC Bank

Bill Adams, senior vice president and senior economist for PNC, said Grand Rapids and West Michigan’s regional economy is recovering rapidly in regard to unemployment numbers, but labor shortages remain a very real problem locally.

Profit expectations for the next six months have doubled since PNC’s spring survey, and sales and demand have reached the highest levels in the survey’s 19-year history, PNC said.

“Although conditions changed rapidly in August as the delta variant became more prominent and COVID-19 cases rose, there was essentially no change in sales growth expectations between the first and second halves of the month,” Faucher said. “While optimism for leaders’ own business prospects tempered as the month progressed, it is still significantly higher than it was earlier this year, and the economic outlook remains solid.”

However, inflation is now a greater concern, as price hikes are expected to keep up with higher input and labor costs. More than half (54%) of business owners surveyed expect to increase their prices, and the anticipated hikes will be substantial, as more than a third expect to boost prices 5% or more, with favorable market conditions and higher costs cited as the leading factors. That’s a record high since PNC first asked the question in the survey in the fall of 2007.

“With demand very strong, (small businesses) see that they have room to pass on those pricing costs to their customers, so that will help small businesses to stay profitable and keep their business models functioning, despite the inflation in the broader economy,” Adams said.

He noted this price inflation is not expected to depress the “supercharged” demand currently in effect from the federal stimulus funding and historically low interest rates.

Housing prices, supply chain

Adams said household wealth in West Michigan has increased for some, due to historically high housing prices.

“We have housing prices well above where they were in February 2020, and if you’re looking back relative to the peak of the housing bubble of the mid-2000s, housing prices are well above that,” he said. “That’s a driver of household wealth and consumer spending power that does not provide the same support to household balance sheets in parts of the country where the housing market lagged after the Great Recession.”

He conceded the flip side of the housing market good news is historically low supply, a problem that is still pricing many out of the market, but he believes that as the pandemic comes under better control, older individuals who were holding off on selling their single-family homes and downsizing may do so, easing the pressure on inventory somewhat.

Adams added another pain point on the housing market — supply chain issues — could soon resolve as the “abnormally high” demand for goods seen during the pandemic, when consumers were stuck at home, is redirected toward demand for services, such as eating out or traveling.

“That’s going to relieve some of the stress on supply chains, and that’s when I expect to see supply chains recover generally, including supplies for construction materials,” he said.

Different operating environment

Many businesses have made permanent changes to the way they operate since the pandemic, according to the PNC survey.

Nearly half (47%) had employees shift to remote work due to the pandemic, and among those businesses, 42% have returned fully to in-person work, with another 17% expecting to transition their workforce back eventually. Many anticipate more permanent changes, with 25% saying they will transition to a mix of virtual and in-person, while another 9% will provide employees with the opportunity to choose where they work.

“The pandemic will have far-reaching impacts on small businesses,” Faucher said. “In addition to higher inflation and disruptions in production and labor markets in the short run, the relationship between businesses and employees has changed. But over the long run, the economy will fully recover, benefiting small businesses and, ultimately, the workforce.” 

Other key findings include:

  • Hard to hire: Of those business owners who are hiring and experiencing challenges, 58% cited enhanced unemployment compensation benefits as the root cause (federal enhanced unemployment benefits expired Sept. 5, after the survey ended), with 55% citing worker concerns about workplace health and safety, 45% saying workers’ priorities have changed, and 45% saying workers are demanding higher pay.
  • Inflation pressures: 54% expect to raise their own prices over the next six months, a high in PNC’s 19-year history of conducting the survey. Thirty-six percent expect the hikes to be substantial: 5% or more. Forty-two percent say they are increasing prices in response to favorable market conditions (52% of service industry businesses), but 33% cite higher nonlabor costs, and 25% cite higher labor costs. Non-labor costs are a more prominent factor in the manufacturing (45%) and construction (42%) sectors.
  • Pricing pressures: Some of the pricing pressures are coming from anticipated supplier price increases; 46% expect supplier price increases, little changed from spring (43%). Expectations for supplier price increases are higher among the manufacturing, wholesale/retail and construction sectors. These pricing dynamics have led to higher inflation expectations. Eight in 10 respondents expect increased consumer prices this year, and most (62%) expect the rise to be 3% or more; 38% expect a jump of 5% or more, a survey high.

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