Ep. 8: Small Business Optimism Remains Below Average but Stable

April’s Small Business Economic Trends data shows that optimism has leveled out from March’s sharp decline but remains below the historical average. As businesses continue to adjust to inflated fuel costs, small business owners’ expectations on improving economic conditions fell seven points to their lowest level since October 2024, while earnings trends overall improved for the month. NFIB Research Center Co-hosts, Holly Wade and Peter Hansen, unpack what the trends and research means for small businesses moving forward.   

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

Other highlights include: 

• The NFIB Small Business Optimism Index rose 0.1 points in April to 95.9, below the 52-year average of 98.0 (0:00) 
• Optimism Index components show movement, with economic expectations down seven points and earnings on the rise (1:10) 
• Why profits have rebounded but outlook is low (2:34) 
• Fuel cost effects (5:17) 
• What influenced April’s Employment Index decline (8:40).  
• Labor as the top problem for small business (9:41) 
• Tax season (11:33) 
• Inflation as a top concern (12:37) 
• Uncertainty Index (15:55) 

Transcript

NFIB Small Business Optimism Index

SPEAKER_01 0:00

Hi, Peter. It's another month for the survey, and we uh saw an uptick of a tenth of a point. So while there wasn't much movement in the optimism index this month in April, so this data is from April, there's still a lot to talk about. There are a lot of components or questions within this survey that had some interesting fluctuations and you know, certainly reflecting some of the economic challenges that they're facing at the moment. So why don't I start just by going over some of the headlines and then we can get through the details that were most notable within the survey employment, capital spending, or lack thereof on that, and their biggest challenges right now. But the headline measure of 95.9, which is far below the 52-year average for the index of 98, but kind of it did level off from the March number of 95.8. So again, there wasn't much movement in that, but we did see some movement within the index components, those 10 index components that make up our optimism index. And one, not surprisingly, that fell was expecting economic conditions to improve in the next six months. So that fell seven point. That was the main contributor to the downside of the index. On the upside of the index, though, was earnings trends. And so that was great to see that earning trends improved from, admittedly, a low number of now at a net negative 19%, but did improve since March. And so that was notable. And then inventories improved, current inventory levels improved, plans to increase inventories that ticked up three points. But on the downside, along with expected economic conditions to improve, that fell was sales expectations. So more small business owners said that they expect sales to decline versus increase over the next quarter. And that was something that was notable within the index.

Why profits have rebounded but outlook is low

SPEAKER_00 2:24

Yeah. Yeah. I just want to double-click, I think, on the underlying components because I think they tell such an interesting story over the past two months. Just to add that little bit more context, in February, we were a little bit above the long-term average. And then in March, with the start of the Iran conflict, and really what matters to the small business community is that fuel cost, 80%, uh just to touch over of small businesses use gasoline, that's part of their kind of cost matrix. So seeing gas prices up at that$4 mark and above sometimes is quite a challenge. So when we saw this like big downward shift in the index, and it was really driven by earnings trends, aka profits. And so the kind of clear interpretation of what we saw with profits was okay, their prices were probably pretty steady, but their costs went up as fuel costs went up, and therefore profit dropped. Now, what do we see in this second month? Well, we see earnings trends kind of bounce back. Indeed, they increased prices a bit. And good guess that that's a key part of why their profits earnings looked a little bit better this month. But where you saw more of the negative economic expectations, good time to expand. In fact, those economic expectations were the worst since October 2024, so just pre-election. And I think that's you know quite an interesting transition you see among these 10 components of the index.

SPEAKER_01 4:04

Yeah, and I would also add that for small business owners, the hit on energy prices, it's gonna hit their bottom line first before they can pass along those costs to consumers. And so that's as you mentioned, that's where we did see the three points decline from February to March. And that was largely the case. And then, as you mentioned, thinking through how this might last a number of months, but then also how long are those higher prices going to last, even if they resolved in negotiated terms tomorrow? You wouldn't expect oil prices to decline immediately. So there is a lot of uncertainty related to how long this will impact their business and how much they can shift those additional costs to consumers without worrying about competition. And we've certainly seen from comments of small business owners that that is a real concern for many of them.

Fuel cost effects

SPEAKER_00 5:06

Right. Yeah, and I think just two factors about kind of duration. One is the way we've seen the conflict play out. Now it's lasted for over two months. And so if you're a small business owner and you're thinking, okay, fuel prices, when are they coming down? Your ability to build up confidence about them coming down and like, you know, if they start to take down your confidence that they're okay, this are they really just permanently down now, and I can plan around that is lower. Not to say it's not gonna bounce back, but uh that's just as we see this kind of prolong, it gets harder to then convince yourself it's coming back down, and when it starts to come down that it's a permanent decrease. And then a factor that you mentioned, you know, they're not gonna just immediately raise their prices the second their input costs increase. Those prices are kind of sticky the other way too. Like the, you know, the fuel costs go down. They don't be like, okay, I'll just like go back to the price regime. You know, they want to give their consumers consistent pricing, they don't want to have numbers bouncing around at all times. You know, Wednesday is different from Friday. So they're a little bit cautious in setting those prices. So that's just kind of the understanding that I think observers should have as they're watching these small business numbers and understanding how they're responding a little slow to increase prices. And then probably, you know, on the back end, if the fuel price spike we're experiencing goes into the rearview mirror, they'll come down, but it might take a little while. It's not going to just snap back down to the previous level, might stay higher for quite a while.

SPEAKER_01 6:34

And then on the other end, the focus is often how does this impact employment? What are small business owners doing as far as their workforce, hiring plans, filling those job openings that they've, you know, many have had for months, and is all of this policy uncertainty impacting that? So we released our latest report. If you want to go over that.

SPEAKER_00 7:01

Yeah, absolutely. It's a great, it's a great transition point because uh employment decisions are long-term decisions. You know, if you're hiring a new worker, that's for uh usually at least a year horizon and usually multiple years. And you know, if you're giving out a raise as well, that's a that's you're not gonna be probably reducing that pay. So it's a great transition point from sort of a quite responsive to current conditions metric in the optimism index to a more evolutionary potential metric in employment. And what we're seeing there is still above the long-term average level, but the trend over the last two months is downward. So February was actually quite a nice month, like almost like wow, that's that's surprisingly high compared to non-NFIB metrics and even just the kind of general level of the employment index over the past year. March ticked down, April ticked down again, been going down about a point, a point in change for the last two months. And now we're at 100.4, it's just above the long-term average of 100.0.

SPEAKER_01 8:15

You know, the reasons for the decline though were a bit different this time around.

What influenced April’s Employment Index decline

Labor as the top problem for small business

SPEAKER_00 8:19

Yeah, the the last kind of March, it was about so to add some background here, the employment index has kind of two buckets of components. One is a little bit kind of more like hiring payroll, how many workers you have, and then the other bucket is compensation. In March, the decline was really about those compensation metrics. Now, in April, it was different. So the payroll and compensation components come into the index in two different ways. One is sort of like very much current pulse, and the other is sort of a check. Like, how did the people in the index what were their actuals compared to what they projected three months ago? So it's sort of like, did we meet expectations? And interestingly, it was those did we meet expectations variables components in April that drove the decline from March. So it wasn't that the levels themselves were maybe quite so bad. It was just that if you go back three months ago and compare the optimism then to the actuals now, how the predictions then to the actuals now, that's where the decline came from between March and April, those components. So we're seeing steady, moderate decline, and kind of from interesting aspect of the index from the underlying components there.

SPEAKER_01 9:41

Yeah. And then on top of that, the single most important problem. So it's been an interesting conversation related to employment because we're still seeing almost a quarter of small or over a quarter of small business owners say some kind of configuration of employment is their single biggest problem. 18% saying the quality of labor, their biggest problem. Another 9% saying the cost of labor is their biggest challenge in operating their business. And while there's a lot of conversation about the deterioration of the labor market, slowing down, there's a lot of weakness there for our small business owner members, it's still a good portion of them. It's the lack of supply of those looking for a job that's the biggest hurdle and contributing to what is perceived weakness in the labor market. So while there are still, you know, certain industries and some small business owners that are either losing interest or didn't have interest in building up their workforce or filling those open positions out of, say, attrition of previous employees leaving, over a quarter, it's their single biggest challenge. And so this I think is very noteworthy that that story continues in the small business sector, that there are still many owners out there that are looking to increase employment and they're not finding applicants to fill those positions.

SPEAKER_00 11:11

Yeah, and I think that's where you kind of you know get that important reminder of okay, maybe there's some pessimism in the trend, but the level still is above that long-term average. You know, that still tells us the labor market is roughly in balance.

Tax season

Inflation as a top concern

SPEAKER_01 11:27

And just right under labor quality, as their biggest problem, we have taxes and inflation. So we're now past April 15th tax day. That is not the most favored of days for small business owners across the country. Big reminder of how much they're spending in federal and state taxes, money that they would otherwise use in investing in their business. They did last summer benefit greatly, and it was a huge success story for small business owners in securing that 20% small business deduction that has been so foundational for small business owners in their ability to hold on to more of those dollars and reinvest. But again, you know, April 15th is never going to be their favorite day. So 17% still say that taxes is their single biggest challenge in operating their business. This might be a bit of just in the context of the month of April, because it is such a heavy reminder of how much they continue to spend in taxes, federal or state level. And then 16% inflation. So inflation is still up there as far as a challenge for many of them. Again, with higher energy costs, specifically oil and gas, that has added to the inflation picture for many of them. For those in agriculture, fertilizer is increasing in price. And so that input cost for that industry sector is a huge challenge. So we uh saw inflation tick up a bit. Prices are having to pass along those costs to their customers. But again, in every industry, they're having to think about their competition, and they certainly don't want to lose their customer base over their ability to find options of other companies that may have it either been able to prolong increasing prices or their bigger, larger counterparts that are able to diversify and keep those prices lower for longer. So small business owners are, you know, that is still a huge challenge for them in this latest report and seemingly will likely be a challenge at least in the near term, as far as what they're facing with economic conditions related to gas and oil prices.

SPEAKER_00 13:56

Yeah. And and just a an extra quick and I think important note on taxes is that a lot of the if you have complicated taxes, you know, a lot to get through, a lot of these companies are filing the Automac six-month extensions, pushing the final tax day to September, October. And that's just an important factor to keep in mind. We think about like, okay, tax day. Well, tax day for a business, you know, might officially be March 15th or April 15th. It's unofficially spread out a bit more, or I say officially, but like not in the headlines quite so much, spread out a bit more because there are those provisions. Uh, not about postponing when you pay your taxes, but about when you actually have to file them.

SPEAKER_01 14:37

I mean, small business owners think about taxes year-round.

SPEAKER_00 14:41

Yeah, they're making quarterly payments year-round and like quarterly payments, yes.

Uncertainty Index

SPEAKER_01 14:45

It is constant for the screen of many of their existence for you know um 365 days of the year. And the complexity of it, as you noted, is one of their biggest challenges. So they spend a lot of money on accountants and tax professionals to help them navigate what they are required to pay. And they want to make sure that they're paying what they're required to and not more than that. And that often takes a team of people and a lot of their time to accomplish that. So, yes, taxes is a year-round problem for many of them. April just being the big monthly reminder of those challenges that they face in taxes, whether it's federal or state taxes. So, another month of looking at some of the unique challenges that small business owners face with the index stable, I think, at least for this last month, and for many of them, still thinking through what they might face in the next few months, that uncertainty, unpredictability. And speaking of uncertainty, our uncertainty index fell four points. And that shift was largely from the previous month where small business owners were uncertain about where things were heading, and more of them were in the camp of they're certain that things aren't doing so well. And that was, as we've talked about before, level of uncertainty being high, that's often a very uncomfortable space for small business owners to operate. And moving off of that uncertainty level, you can either fall into you are more certain that things are going to improve, or you are certain that things are not going to improve. And we did see a few more small business owners a bit more certain on the negative end of the scale because of those higher prices that are sticking for longer. That was likely the result of how they were interpreting economic conditions and where they thought things were going in that space. So that's a wrap for the April data for the small business economic trends. We look forward to seeing what the data looks like. It's out in the field right now, and small business owners are filling out those surveys, and we thank them all for their participation so we can better understand what's happening on Main Street. And so thank you everybody for joining us for another edition of Small Business by the Numbers.