Ep. 6: February Data Shows Balanced Labor Market

NFIB’s February Small Business Economic Trends report shows a slight decline of half a point in the Optimism Index, though the Index remains slightly above its historical average (6:12). Podcast co-hosts Holly Wade, NFIB Research Center Executive Director, and Peter Hansen, Director of Research and Policy Analysis, analyze gains in NFIB’s Small Business Employment Index, which shows a balanced labor market through the start of 2026 (9:30) 

Learn more about the February Small Business Economic Trends report and NFIB’s new Small Business Employment Index. 

Other highlights include: 

• Discussion of the NABE Policy Conference, where small business owners spoke about the tangible impacts of regulations on their business (0:05) 
• Price metrics (13:30) 
• Concern about poor sales as the single most important problem (19:40) 
• Signs health care is challenging small businesses right now (22:59) 

Transcript

Discussion of the NABE Policy Conference

SPEAKER_01 0:00

Hi Peter, great to be back on another podcast of Small Business by the Numbers. And I wanted to start off with just mentioning the great conference of last week that NFIB participated in with a small business session, the National Association of Business Economics, which is the largest association for those in the field of economics related to business and all over the spectrum of types of business in all industries. They had their policy conference in Washington, DC last week. And it was very successful conference, a lot of great topics and discussions amongst the attendees. And most of the focus, not surprisingly, was on AI investment, data center investments, the labor market as it relates to AI, but also just the labor market in general, some trade policy conversations, and then a whole slew of other things like taxes and regulatory environment and things like that. But NFIB sponsored the small business session, and we highlighted two business owners, which was wonderful to have folks listen in to hear kind of boots on the ground assessment and stories about how they're operating their business related to trade policy and employment. And so we had Jill Herber, who's the owner of Cheese A Teak in Del Rey or Alexandria, Virginia, but in the neighborhood of Del Rey. She's been around for 20 years and has some really helpful insights on what she's experiencing in as far as business conditions in her industry and in her area. And then we had also another business owner, Sean Gerose, and she is an export specialist that helps small business owners or medium and some larger business owners actually. And she uh is a specialist on exports. So she had a lot of great insights on trade policy as it's affecting exporters, but also importers, and what she's hearing from her clients and how she's talking through and adjusting conversations related to the current state of affairs related to trade policy in all the different areas of their exports and for some of them also imports. So we had a great attendance for our session. For Jill, it was interesting because not only does she talk about trade policy, because she's an importer of wines and cheeses, she has a wine and cheese shop attached to her restaurant and the adjustments that she's had to make related to either pricing or where she's sourcing her inventory from, you know, whether it's shifting to different countries or within the US. But the other part that was very pertinent to NFIB and the issues that we advocate on and work for our members is the regulatory environment and tax environment. A lot of it was the regulatory environment as a restaurant owner in the state of Virginia and just how much time it consumes of her day. But it was, it was just, it was interesting to hear those stories from a business owner in that context. So great conference for again the National Association of Business Economics, their policy conference. And it was just fantastic to have two small business owner panelists talking about their experience and having a discussion about the issues that are important to them. And I'm so sorry that you had missed the conference, but I'm glad that, you know, a lot of the material is available to catch up on. But wonderful session for NFIB and for the NAPE conference.

SPEAKER_00 4:19

Yeah, I'm sorry to have missed out. You know, I think it's so important for economists who tend to understand the world through the dual lens of models and theory and then data as well, to kind of have a little bit of that touch grass experience where you hear the numbers in the form of like specific stories to understand. I I think it really concretizes how our models and our theory are accurate to a certain extent and maybe what they're missing for us to continue learning and offering better insights and understanding. And I think it's it's so valuable to understand, like, okay, we know in theory that something like a regulation is a cost to a business. It makes it more expensive to run, it makes it a little bit harder, particularly small businesses, kind of a fixed cost, and they can't spread that out across as many users as a large business to hear from an owner about like the specific details of how their business is running into hiccups and how that owner is spending time not on optimizing for service or optimizing for price, but optimizing for regulatory details. You know, it's not to dismiss like the value of an inspector in the kitchen to make sure the food is clean, but it's just to really keep in mind that these regulations have trade-offs that you know small business owners are paying a meaningful price on. And we really shouldn't forget that.

NFIB's Small Business Optimism Index

SPEAKER_01 5:41

Exactly. The context, as you said, matters so much. And hearing how operationally that works as far as the time constraints and things like that for the owner makes it just more difficult to operate a business. But with that, let's transition to the February data for our small business economic trends survey and some interesting developments in this survey, some interesting insights that we'll get into. But to start off, the Small Business Optimism Index, the headline measure of the health of the small business economy, lost half a point in February down to 98.8. And this is the third consecutive decline of the index. Granted, these declines over the last three months have been small, but that it is kind of a downward trajectory, getting inching closer to that 52-year average of 98, I think is a bit meaningful that, you know, we haven't seen kind of a plateau or an increase in optimism over the last number of months, but this kind of small erosion of optimism. But again, we're still above the 52-year average, so that's a good sign. And the main movers with in the components of the optimism index, the main contributor to the decline was a retreat or deterioration in the percent of small business owners expecting sales to improve over the next quarter. So we look at the net percent of sales expectations. So those who say that they anticipate sales increasing minus those who anticipate sales decreasing. We saw an eight-point deterioration for that question, which just basically was negating the improvement of the previous month. So now we're back to where we were a few months ago. But that deterioration was meaningful to the decline, the half-point decline in the index, and then a four-point decline in plans to increase employment in businesses over the next quarter. And you'll get into that, the kind of the labor conditions of the small business sector. But those were kind of the two main drivers. The largest mover in improvement, which was nice to see, was earning trends. So we saw a seven-point increase in the net percent, saying that they experienced improved earnings over the last quarter compared to the previous quarter. And that component was one of only three that improved over this last month. We had a three that didn't move at all and four that deteriorated. But the biggest improvement for the components in the index was earning trends. And the largest contributor to the decline was sales expectations. With that, I will turn it over to you if you want to go over what we saw in the labor market, which is a focus for a lot of people out there.

NFIB's Small Business Employment Index

SPEAKER_00 9:06

Yeah, the headline on the labor market is I would say good news. Late last year, we were talking about this this plane that had been declining and was it starting to level off? Deceleration from the peak in 2022. That was good news for a while. By 2025, the deceleration was no longer good news. It was starting to be a concern. And we launched our new small business employment index in January. That kind of put together a few of kind of our disparate questions to kind of combine it into a useful single number that confirmed what we were talking about before and kind of crystallized the story of decline, flattening. And then now with these two months of new data, January, February in particular, possibly some optimism about reacceleration. I think it's quite interesting as well in the context of broader U.S. government statistics, you know, looking at unemployment re the monthly unemployment report, where in 2025 it was quite a disappointing year, like quite a strong disconnect between GDP, which was tracking towards kind of 2.5% annual growth, which says not a spectacular year, but certainly a solid year. And then the labor market, really flat jobs growth, some tough months in there, some downward revisions, unemployment ticking up, still at a healthy level, but a rough year. And then January came out and said, ah, some job growth, a real positive upward surprise there. An upward surprise that was presaged a little bit by our employment index and what it was saying about positivity. Now we're recording this two days before the February jobs report comes out. So we'll we'll see what happens there. But certainly what the small business employment index is saying is have some optimism for a result that's better than what we saw for most of 2025. Now, the uh small business employment index is right around 103.5. That's about a point up from January's level. It's three and a half points above the historical average. So I would say still certainly a balanced labor market in the small business. I would say as well that there's not strong hiring pressure, that the kind of uh when you look at the components of the employment index, it's driven a bit more by these sort of compensation components as opposed to the employee count and hiring type components. But overall it's balanced, but it leaning towards the real positive side as opposed to maybe like neutral and so-so. Now, always want to have more data. This is like I said, like the first month that we've gotten into, I would almost say that that truly positive territory. So we'll want to see more months before start talking about good conditions. And if you look at some of the other details, we saw labor quality as the single most important problem continuing to decline, which suggests a little bit more slack labor market, easy hiring market than maybe the employment index alone suggests. So there's detail in there, but overall I would say a good sign of a change in trajectory from that downward trend that we saw for several years, and a positive sign for an overall labor market that is not easy for small businesses to navigate still, but one that's showing that they're they're competing for workers and they're and they're having to bid up a little bit on them for all the challenge that is for small business, but all all the good it means about the way that they're investing and planning and being optimistic about the future.

Price metrics

SPEAKER_01 12:56

Yeah. And on that front, with compensation increasing or more small business owners saying that they've had to increase compensation, planning to increase compensation, those pressures are still there. And that is kind of flowing through prices in that the inflation picture for small business owners, you know, inflation is still elevated than what we have typically seen or the average readings for the small business sector over the last 52 years. So, but with that, on the prices for small business owners, we did see both actual prices and price plans decline a bit in February, even though they remain at elevated levels. And as far as inflation being their single most important problem, that remained flat from January. So we didn't see any movement there. But still, you know, from January, a net 24% say that they've raised prices over the last quarter. So more owners than we normally see over the average of the last number of decades are increasing prices right now. This is the third consecutive month of this question and those responding, the net percent declining. But again, we're still elevated historically speaking. So inflation is a constant pressure out there for a lot of small business owners. Part of that is these compensation pressures that they're still experiencing and having to pass on those costs to their consumers. But it has eased up a bit. So that's good news. And then when we ask about just the general health of their business and how they assess the health of their business, you know, 12% still evaluate their business as excellent, a bit more than half, 55%, evaluate their business as doing good, 26% fair, and 5% are rating it as poor. The ratio or the configuration of these answers hasn't changed much over the last year. And so we've seen some fluctuation, but in very narrow bands. So it's been relatively stable over the last 12 months. For the most part, the vast majority of small business owners are evaluating their business as doing pretty well. So also a good sign. Anything else that's notable that you saw in the data, Peter?

SPEAKER_00 15:38

Yeah, I'd I'd point out a a couple of details. You know, one, just to add on to your points about inflation, it's really nice to see some of those metrics ticking down a couple of consecutive months because if you look at the multi-year trend, like the recent three, four years of data, you saw a very strong downward trend that kind of suddenly stopped and almost looked like it re-accelerated. Now, you're squinting when you're talking about that description. It's not clear that it's re-acceleration is happening. But it is clear that the downward trend where we we fell way down from this substantial peak has stopped. And we have not come back to the pre-pandemic normal, the Federal Reserve target type details. And it's a really an open question of if and when we're going to see conditions get back to that for small business owners. And it's good news on pricing, it's maybe less good news on compensation. Of course, there's an input cost that then leads to pricing down the road. So that's definitely an area where I remain nervous and continue to look for more substantial momentum in the pricing details. I would say a positive spot that is related to the components of the index, but isn't in the index itself is actual sales. So we saw earnings, the big positive note. We saw expected sales, the quote unquote negative note in the fact that it moved down substantially, but that was really just a renormalization from a big bounce in the previous month. So nothing too concerning there. Actual sales was really positive. It was one of the best months in quite some time. And it's just really good to see those concrete data points, especially something as important as sales for small businesses performing well. And that was certainly worth highlighting since it, you know, it's not in that index, but it's one of those things that also contributes to consistent own business health. You know, it's a little less forward-looking, but still really valuable for these businesses that need those sales. That's the lifeblood. What about capital outlays? I know we saw some movement there. What did we see on that, Holly?

Concern about poor sales as the single most important problem

SPEAKER_01 17:59

So interestingly, for capital outlays, planned capital expenditures, we saw some deterioration there. And it's at really low level. So it doesn't appear that small business owners are terribly excited or interested in big capital outlays in their business, investing in their business. They might be sitting on the sidelines a bit longer to see how conditions evolve as far as sales in their business, because we have seen quite a bit of fluctuation in sales expectations over the last few months. So they might be holding on to their cash a little longer to see where those investments might be most beneficial for their business, whether it's incorporating AI components into their business, if that makes sense for their industry or equipment or other things that need replacement. But it does appear that more are holding on to cash and kind of waiting it out. But we've seen this deterioration for a number of years, just a slow decline in capital spending. And so it'll be interesting to see how this develops over the next few years, especially with that focus on AI and as technologies evolve in that space and how small business owners might be investing in those technologies going forward to help optimize business operations and what that looks like for them. But that was that was also notable in our survey. And then we were talking about this before recording the podcast that poor sales ticked up as far as single most important problem. And just wanted to acknowledge that in that 11%, one in 10 small business owners are reporting that poor sales is their biggest problem in operating their business right now. And so that will be something to follow going forward to see if that starts climbing a bit more or if it levels off where it is, since we don't see any deterioration in the key components, key data points in the rest of the survey. So I did want to point that out too. Did you have anything else you wanted to note on that since we were talking about it before?

SPEAKER_00 20:29

Yeah, I'll just give, let's say, this is this is the glass half full. And it's a little bit of a devil's advocate point, but we are in an environment when you're looking at that single most important problem data where the big issues that really dominated for a long time, inflation and labor quality, have faded into the background. And you see some kind of classic signs of that, with, for example, taxes increasing as single most important problem when we know that generally taxes are very consistent. There's the 20% deduction is now permanent, right? It's not some clear national increase that's driving that. So it tells us that perhaps the increase in that problem is due to nothing else soaking up the oxygen. So my kind of glass half-full hope for why poor sales is ticking up is that the same kind of extra oxygen that is no longer being taken by inflation and labor quality is having more businesses who are having, maybe let's say, okay sales, so-so sales, sales that are below target. They're looking at this list of options and going, well, I guess I'll say poor sales. Normally, when we see poor sales spike, it's because it's a recession and poor sales is a really big problem. It's it's dramatically missed numbers. I'm hoping that this is a small percent of our respondents pool who are just having a few percent below when we're gonna be able to do that. What they were hoping for type sales, and choosing that as a top issue because there's really nothing else that's burning a hole in their pocket or something like that. So maybe too optimistic, but that's my hope for seeing poor sales be so high. And especially kind of reconciling why is poor sales kind of high? Why is it trending upwards in an environment where actual sales and even our sales optimism, although down this month, are at pretty decent levels compared to historic norms.

Signs health care is challenging small businesses right now

SPEAKER_01 22:28

Yes. And then putting it in that context, that is very helpful to point out too, because it is kind of reconfiguration now that those two previous main pressure points for most small business owners have deteriorated or eased up as far as it being significant problems for a lot of them. And then just to close this out, I did want to talk just a bit about a lot of the comments that we've been receiving. So in our survey, there's a section for respondents to provide comments of something that they want to make sure that we understand that wasn't part of the survey or to emphasize something that was within the survey. And in February, we received a lot of comments about frustrations with increased costs of health insurance. And we know that the cost of health insurance is a significant problem for many small business owners. It's one of their most kind of consequential costs related to compensation for those who offer the benefit to their employees, but also those who can't afford to offer the benefit to their employees and in covering themselves, the owners. So we did receive a number of comments related to the cost of health insurance and that it's becoming a significant problem in their ability to be competitive as far as talent in their business, being competitive in offering compensation packages in recruiting for those open positions if they have one, but then also covering themselves, the owner, as far as providing health insurance for themselves. So I wanted to acknowledge that we did see a kind of a huge spike, probably in light of the renewals of health insurance packages that they're just now experiencing the increased costs of those benefits for 2026. So we'll be watching out for that too.

SPEAKER_00 24:40

Holly, it's super interesting that you bring that up because if you remember from last month in the January data, single most important problem, we noticed a meaningful uptick in insurance as a top problem. And we were kind of hypothesizing in the background that that was potentially caused by health insurance. The option on the survey just says insurance, so we can't directly link it. But knowing the time of year and knowing the policy context, it made us think health insurance. So it's quite interesting that now in these open ends, you're seeing health insurance crop up more than it has historically. So a very interesting point you brought up there.

SPEAKER_01 25:17

No, that's a really great point, Peter, because we did talk about that last month in that increase of those respondents saying that insurance was their single biggest problem. So it, you know, does represent that transition does make sense. That now we're starting to see more of those responding to the questionnaire commenting on health insurance costs. But that's a good wrap for the February data of the Small Business Economic Trends Report. Thank you for everybody listening to the podcast and look forward to next month where we look at the March data. Thanks everybody for listening to this episode of Small Business by the Numbers.