Ep. 7: Small Business Optimism Falls in March

The March Small Business Economic Trends data is largely reflective of small business owners’ and consumers’ reactions to a dramatic spike in oil prices. Small business owners are having to absorb those higher input costs and pass them along to their customers. NFIB Research Center Co-hosts, Holly Wade and Peter Hansen, calibrate what are considered significant changes in a month like this.  

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

Other highlights include: 

• NFIB’s Energy survey clearly showed energy was a large component of cost related to business operations (4:03) 
• The NFIB Small Business Optimism Index fell 3.0 points in March to 95.8, leaving it below its 52-year average of 98.0 (6:27) 
• The biggest contributors to the decline in the index (9:02) 
• A large shift of 4 points in the health of their business (15:42) 
• Small business landscape in hiring plans and unfilled job openings (17:10) 

Transcript

SPEAKER_00 0:00

Hi, Peter.

SPEAKER_01 0:01

Hey, Holly.

SPEAKER_00 0:02

Well, I think for this survey, going through the results, we're going to need to put this in some context. The March survey data was sent out to our members, NFIB small business owners, at the beginning of the Iran War. And so this is largely reflective of their reaction to how it's impacting them personally, how it's impacting their ability to operate their business. So I wanted to just have that as the kind of broader context for this because we're going to talk a lot about how they're dealing with some of these transitions as far as foreign policy, which is kind of a new area for small business owners that's not typical for the most part.

SPEAKER_01 0:50

Right. And so I've been at NFIB for just less than a year, which means that this is the first time that there was something that happened in the month that was like, oh, hmm, that's really going to be a potentially significant factor reflected in the numbers. Now, for calibration, we know that small businesses care about their local markets.

SPEAKER_00 1:12

They do, yes.

SPEAKER_01 1:13

International stuff, that's really kind of a bit of an aside. However, we also know that oil prices are up substantially. So there is a factor that's going to reflect on their actual day-to-day and how they're running their business. We'll talk a little bit more about our recent energy survey and kind of the context that we have on energy costs for them. But Holly, help me out here because coming in before I saw the numbers, I didn't really know how to anticipate what we would see. What is a significant change in a month like this? What's a small change? What's a big change? You know this survey as well as anyone alive, pretty much. Talk us through this.

SPEAKER_00 2:06

The originator, but yes.

SPEAKER_01 2:08

Dunk the ultimate guru, uh high on the mountains. Yes. Exactly. But number two in the world is you, Holly. Uh so talk me through this, talk our listeners through. What should you come in expecting? Help us calibrate ourselves for a change like this.

NFIB's Energy Survey

SPEAKER_00 2:26

Yeah. It was interesting because thinking about the numbers coming in, and before we uh saw the impact, it was clear that the uh spike in oil prices, the spike of gasoline at the pump, we all saw the numbers, watching the news, certain states were having a more difficult time than others with these really, really high gas prices. And so I certainly anticipated it being uh impact, having it be a shock to small business owners. It was just dependent on the magnitude of how much it would really impact their bottom line. They've gone through a lot as far as inflation spikes and uncertainty related to some of these shifting policies and how they're impacting, whether it was, you know, earlier last year with the tariff policy and liberation day, how that was going to impact them. We saw a drop in our index, optimism index related to that policy shift. And this was kind of a new one. This one, though, really hit their bottom line. It impacted their input costs immediately. And so there wasn't a you know a lot of hesitation about how they were going to react. It was absorbing those higher costs and figuring out the degree to which they would need to immediately pass along those costs to their customers or absorb them in other ways within business operations. So I knew that there was going to be this impact. It was just the magnitude of the impact was still a bit unclear. However, as you mentioned, we did have this energy survey that clearly showed that energy, whether it's electricity or gas prices, was a large component of cost related to operations for many small business owners. So to put this in even more context, do you want to go over some of the highlights from that?

SPEAKER_01 4:24

Yeah, I would say a couple of things about the energy survey. I would say number one is one thing that really stands out is that small business owners really use a wide variety of energy sources. Electricity is the number one, but a huge percent are citing gasoline, diesel. I mean like supermajorities. So it's really a very high percent of our response pool in small businesses who are vulnerable, are affected by any increase in these costs. Number two, when you looked at the data, which was collected really near the end of last year, it was clear that electricity was the biggest headache. And the number one part of that is that electricity is the most used. But number two part of that is that that was in an era when gas, diesel, those sorts of prices were pretty low.

SPEAKER_00 5:18

And they were declining for a number of those months. Right. So we saw oil prices and gas prices fall.

SPEAKER_01 5:23

Trevor Burrus, Jr. Right. You know, in the in the maybe the$2 somewhere, like this is not something that is keeping small business owners up at night, especially compared to electricity, which has been increasing for several years. And you know, if you put that into real terms, like it's maybe not leading out and above the inflation that we've experienced in the last three, four years. But that inflation that we experienced the last three, four years is a headache. And so electricity costs moving up kind of in tandem with that, some states higher, some states lower, is a real headache.

SPEAKER_00 5:55

So it contributed to the problem for real. Right. Certainly.

SPEAKER_01 5:57

Trevor Burrus, Jr. So I think if you take kind of those two factors together that lots of people are using gas and diesel, and they're highlighting electricity where like their electricity costs are high relative to what they're used to, more than they're highlighting gas and diesel, but gas and diesel were low at the time and they're not low right now. I think you can really kind of get to this place where you understand, oh, they're going to be bothered by this. This is going to be a negative factor for their businesses.

NFIB Small Business Optimism Index

The biggest contributors to the decline in the index

SPEAKER_00 6:24

Aaron Powell Absolutely. So let's get to the numbers. While Small Business Optimism Index didn't collapse under our feet this last month, the index fell three points. And that's a meaningful shift. Now we're below the long average history of the index. And so we're looking at an index number that's below 98. Right now we're at 95.8. And that three-point drop was significant. It wasn't as significant as we saw, say, during the Great Recession. But as far as a policy shift and having most of that be in relation to higher gas prices, that's a big deal. And it's contributing to the uncertainty index and other components within the survey of seeing how small business owners are reacting to having to absorb these higher costs within business operations. And as you mentioned, oil and gas is a large component to costs within many small business owners. And it's not just vehicles, it's equipment, it's the ability for their employees, if they have to drive a long way to get to the business. They're hearing these complaints across the board, and this is something that they have to manage, which wasn't on the table a few months ago. And so, new set of problems. It was reflected in our survey data, and we'll get into it. So the decline was a strong reaction, and we saw that. How this moves forward is uncertain. So as things develop, whether the Strait of Hormuz opens up and some of those cargo ships are able to supply the global oil market soon, hopefully this doesn't last too long. But that's kind of up in the air right now. And so as oil prices continue to be elevated, small business owners are going to have to continue to absorb those higher costs and manage their business and also expectations of their customers. And that's always a headache because for small businesses, it's the owner who has to do that, right? And that's a very different set of circumstances than a large business where it's kind of spread out among employees, higher management, all of those folks to help deal with those conversations with customers. At a small business, the owner is having to talk through and figure out how to relay these messages if they're having to pass along these costs to their customers. So why don't we go through some of the biggest contributors to the decline in the index, and I'll hand it over to you for the big one that we saw.

SPEAKER_01 9:10

Yeah. The big one is profit trends, a drop of 11 points. It was huge. Which is Yeah, pretty shocking. I mean, this is of course, the index is down three points, which means this is a bad news report. Call of spade is paid. And those declines are a little bit across the board. There's what, eight categories that are down and two that are flat.

SPEAKER_00 9:36

Nothing was positive.

SPEAKER_01 9:38

Nothing was up. We're not feeling great at the moment. One thing I'll just pause and say, looking back through the history of the index, you know, when were we most recently at a similar level? And the answer is a phrase you mentioned, those liberation day tariffs, April of 2025, put the index at also 95.8. The reason I bring that up, though, is to note that that was a bad news report, and then it was right back up the next month. You know, what we're seeing right now is very short term. It's an immediate reaction. And hopefully, it's something that goes away very quickly. And this time next month, we're talking about a positive news report. But right now we're talking about a bad news report, and that bad news is led by a significant decline in profits. So what we're seeing there is probably a lot of it is just all of a sudden input costs. Operating business's costs went up meaningfully, and businesses didn't turn around that same day and raise their own prices. So at kind of a similar revenue, costs are up. Profits down.

SPEAKER_00 10:42

We know that from talking with small business owners and previous surveys, in that the first hit of absorbing those higher costs are profits. So small business owners are taking the hit personally with absorbing those costs and then over time passing along those costs to customers. Because if you don't pass along the costs to customers at some point, you're gonna be out of business. That doesn't work. But the first hit is always profits. And as you mentioned, that was clearly reflected in this survey. And with the Liberation Day, it was a huge hit initially, and then there were a lot of negotiations and the timeframe shifted, and so the impact for many small business owners, it was diffused a bit over time. Our April survey is out in the field right now. So we're collecting data right now as small business owners are receiving our April survey, and not much has changed. So in thinking about how this is going to move forward, likely it will be kind of the same environment, at least for the next few weeks as far as oil prices, because it takes a while for the global market to recalibrate after things have been resolved, which they aren't right now. So it's a situation that has some more staying power than the tariffs initially. And the price shock was clear. So wanted to put that in perspective too, that for small businesses, the hit on profits is always going to be the first where we see those show up in our survey first until they are able to pass them along. In this context, we saw an elevated number of small business owners saying that they had increased prices. So talking a little bit about on the inflation front, but fewer are saying that they're planning to, which is interesting. So maybe they feel that this is kind of a one-time step up in trying to pass along those costs to their customers, and they've done that pretty quickly related to this. But we'll see as that goes forward, because the anticipation of how long this war might last when they were filling out the survey, now we have a more clear picture. So that all might shift when we see the results from April.

SPEAKER_01 13:08

Yeah. And you know for context for folks listening in, we're recording this the morning after the ceasefire was announced. So there is And no, it's all about timing in the timeline for all of these surveys. Trevor Burrus, Jr.: Dow's up over a thousand points. Oil is down 15 percent. Now Brent Crude is still up in like the mid-90s, as of when I checked Bloomberg about an hour ago. So maybe there's that silver lining. So people who are taking the survey today, tomorrow, going forward, are in a more positive frame than the ones who took it in early April, and the people who, of course, were taking it in March and giving us our March data. But it's a two-week ceasefire. Who knows what's going on going forward? And gas prices are still high, right? Oil price down 15%, but that's still way above what they were at this time in February, in our February response pool. So there's a lot there. I'm glad you kind of started to bring up some of our specific inflation-adjacent data here because it's an interesting picture. There is, as you mentioned, actual prices, those responses are up. Plant prices, interestingly, down. We have our question about supply chains, that ticked up a little bit. Single most important problem, inflation, that ticked up two points. Inventory plans, they reported kind of reduced inventory plans.

SPEAKER_00 14:32

I think also satisfaction, too. So more saying that they have excess inventories than those saying that they're too low. And so that was another signal of maybe they're a bit panicked that they have too many things in back storage waiting to be sold. And so the anticipation of consumer spending or whomever their consumer is for their product or service is it's on shaky ground. Trevor Burrus, Jr.

SPEAKER_01 14:59

And there's a really pessimistic way to look at this. They think they have too much inventory now. They're planning to reduce inventory. They're not anticipating increasing prices. It's like a recession orange light flickering a little bit, that they think, oh, there's a downturn in demand, all of a sudden my stock is too high, I'm gonna have to lower prices to offload this stuff. Folks, don't take that too far. That is one way to reconcile the data. Yeah, I think that I'm more optimistic that April's gonna be up. You know, the the R word isn't does not deserve to be really talked about. It's just like when you're looking at this report and kind of trying to like parse out what's saying what and why, I think that's something that you just have to be frank and understand is a little bit of pessimism in the way that they're thinking about future prices and future stock.

A large shift of 4 points in the health of their business

SPEAKER_00 15:41

Trevor Burrus, Jr.: And along those lines, we also have that new question of the health of their business. And there was a pretty large shift, four points, from those in February saying that they evaluate the health of their business as good, and that was four points lower. Those who responded their health of their business as being fair was four points higher in March. And so that shift was also notable to me because it just showed that small business owners are a bit more concerned, things are slowing down, they're having to recalibrate operations based on some of these shifts and the health of their business. It is another really good viewpoint into how they are specifically looking at their local economy and how they're able to operate their business. And so that shift, we'll see how that looks going forward. But for the March data, that was another signal of stress within the small business sector.

SPEAKER_01 16:46

Trevor Burrus, Jr. Right. And for folks who are maybe a little bit less familiar with how we think about this, the optimism index is very comprehensive.

unknown 16:52

Yep.

SPEAKER_01 16:53

It's designed to be a bit more forward-looking. And so the health of the business is a kind of complementary metric that's much more important in time. It's just today, the health of your business, and that's also narrow. It's just your business. So it kind of takes out anything that's a little bit more vibey, a little bit more, hey, make a prediction.

Small business landscape in hiring plans and unfilled job openings

SPEAKER_00 17:09

A week and a half ago, we released the jobs report and our employment index. And so wanted to shift gears a little bit to see where that landscape is as far as small business owners in hiring plans, unfilled job openings, all of those sorts of things. Do you want to go through a bit about that and give just a quick overview of what we released in our jobs report?

SPEAKER_01 17:35

Yeah. So that was also, let's say, a little negative, but much more kind of a neutral result. February's number had been almost implausibly high, really a few points above the historical average, comfortably above a 2025's average. And that was surprising. Not in the sense that not in the sense that the index was going to be above its historical average or going to be above 2025. We are seeing some signals kind of broadly that the worst moments in the labor market were maybe mid-late last year. So and that things have been a little bit more positive. But it's not a surprise to see things tick down. We tick down at just about two points, which leaves the index still comfortably above its historical average.

SPEAKER_00 18:23

The employment index.

SPEAKER_01 18:27

Now that continues to be driven a little bit more by its components that are about compensation rather than its components that are about sort of payroll amount of hiring amount of employees on staff. So it's reflecting a little bit of that hiring pressure, inflation pressure, desire for skilled employees and trying in the fight to keep them. But I would say it's an okay signal. And to caveat that just a little bit, we wouldn't expect employment to shift really fast. You know, one thing that economists have established quite firmly is that the labor market tends to be a in quotes lagging indicator. It doesn't show it right away. Hiring decisions, they take months.

SPEAKER_00 19:09

You know, you decide to do even b small business owners, as with large business owners, you want to be pretty confident that things are really ramping up or deteriorating before you make some bold decisions about jobs and your employees, and they are the largest cost but contributor to productivity and operating business. You better be real certain that this is the direction that you want to go. Yeah. Because, as you said, it is so time-consuming and it's a huge expense and investment in their business. And so, again, lagging indicator.

SPEAKER_01 19:44

Trevor Burrus, Jr.: So absolutely employment, I would say, frankly, fairly steady in the kind of overall trend of 2026 looking a touch better than 2025, still with a low hire, low fire environment, still with a bit of wage pressure. And so a little bit wait and see will some of the negativity in the optimism index endure and then translate into worse employment index. We'll see.

SPEAKER_00 20:10

Yeah. And then the other area that was notable is capital spending. So purchasing things to invest in their business, and we've seen a decline in that also. So small business owners seem to be holding on to their dollars a bit more, or more of them are holding on to their dollars. And so we saw a decline in capital spending plans going forward in the next three to six months and actual capital spending. So small business owners are hesitant about parting ways with those profits, as you mentioned. Profits took a big hit last month. So not surprising to see that as well. And the other part of it is for those who are financing those investments in their business, because of these inflation pressures, I don't expect the Federal Reserve to start lowering rates anytime soon. They have held to where they are now. There was anticipation late last year about how many cuts would be on the table for this year. I guess we shouldn't say that we would anticipate them not doing anything for this whole entire year, but right now it seems like things are on hold. So financing costs of those big investments, they're not getting any relief on that front either, and likely won't for some time. So that's probably part of the equation related to CapEx and their plans and actual spending and all of that, because we do know that many small business owners finance, and financing costs are still elevated. Trevor Burrus, Jr.

SPEAKER_01 21:42

Kind of a scary number associated with that capital expenditure expectations. 2009. That's not a level, that's not an amount. It's the year that we were at last at this level. 2009 was the Great Recession.

SPEAKER_00 21:56

We don't want to see anything that falls down to those levels. Nothing good happened. Trevor Burrus So that's disappointing.

SPEAKER_01 22:03

For me, I'm spot on about I think the interest rate point pre-Iran, they're kind of pricing in the market was pricing in two cuts, now kind of pricing in zero cuts, but a wider cone of uncertainty there we'll see.

SPEAKER_00 22:18

And a rumbling conversation of possible rate hikes, which is that would be kind of the worst scenario. But what is the Federal Reserve going to do? They have a dual mandate. So they have to look at both sides of the fence.

SPEAKER_01 22:32

Aaron Powell We're in a much more will see environment on that. And then I think just an important factor to keep in mind is elevated uncertainty. I think it's really catching up to business owners that they don't know which way the wind is blowing, kind of like the hits keep coming in terms of normal. And then there's another reason why the uncertainty drops a few points, it's below the average, and they go, rolling their eyes. This is disappointing, this is a headache. They're dealing with a day-to-day challenge and not optimizing their business to take advantage of a cool new opportunity for the future. And that's been happening a lot in the last couple years, five years, really since COVID. I mean, it's just the hits keeping it. It's a roller coaster. Trevor Burrus, Jr. And so I think that's something that's really deterring small businesses from making those long-term investments. This is a little bit more punditry and analysis of the numbers. You know, it's not like that's clear, obvious from the data. That's just my read of kind of trying to parse why we're seeing a 2009 level for investment capital expenditure.

unknown 23:35

Trevor Burrus, Jr.

SPEAKER_00 23:36

Yeah. No, completely agree. It's been a roller coaster of policy shifts over the last number of years, different types of policies, but impacting small businesses to varying degrees. This one being a policy shift that is impacting a lot of small business owners. So any final thoughts on the March data before we wrap this up?

SPEAKER_01 23:56

Aaron Ross Powell You know, I'm optimistic for the April data. I'm hopeful. And that April will be meaningfully more positive. We'll see. It's far from written in stone, but in a negative kind of conversation here, I want to end with my final thought being like I'm a little bit more optimistic looking forward, even though I have to be realistic about the negative of what we are getting right now from the March data. What about you?

SPEAKER_00 24:27

Aaron Powell Small business owners are resilient. They are resilient. It is the dynamic part of the U.S. economy. It's amazing to watch small business owners and hear their stories about how they adjust business, their operations to manage through these real trying times, these challenges that they face. So we'll certainly see if uh oil prices start continuing to fall, and that's reflected at the gas pump. We'll see a better report next month. If it stays the same, at least it's a more firm footing, and hopefully some of the uncertainty related to it will be a bit more resolved. But it is always amazing to me hearing the stories from our members, small business owners generally speaking, and reflected in our survey about how resilient they are. And you had a great piece about small business resiliency that we just posted on the Research Center blog post. And that was a great reflection of that dynamic and that dynamic that's very, very specific to the small business sector. So with that, it's been an interesting report. Look forward to seeing the numbers in April. And thank you everybody for joining Small Business by the Numbers.