U.S. NFIB Small Business Optimism Index (February 2025)

Small Business Optimism Index fell for second consecutive month in February

• The NFIB's Small Business Optimism Index fell 2.1 points to 100.7 in February, coming in slightly below market expectations. 
• Seven out of ten subcomponents deteriorated on the month. The largest declines came from expectations about an improvement in the economy (-10 points to 37%), the belief that now is a good time to expand (-5 points to 12%), and expectations regarding higher 'real' sales (-6 points to 14%). 
• The net share of businesses planning to increase employment fell 3 points to 15%. On the other hand, the share of firms with unfilled job openings rose 3 points to 38%. Quality of labor concerns rose one point in February, with 19% of business owners identifying this as their top business problem. In contrast to other surveys, inflation concerns fell 2 points to 16%.
• The net share of firms currently increasing employee compensation held flat at 33%, while the net share 'planning' to do so over the next three months continued to trend lower falling 2 points to 18%. However, the share of businesses raising average selling prices surged 10 points to 32%, while the share of those 'planning' to raise average selling prices ahead rose 3 points to 29%. The uncertainty subindex also rose 4 points to 104 – the second highest reading on record. 

Key Implications

• Small business optimism continued to moderate in October, falling to a four-month low. This as elevated uncertainty weighed on the belief that 'now is a good time to expand' and took a toll on expectations about an improvement in sales and the economy. On a more positive note, the labor market indicators held up somewhat better. The fact that 'quality of labor' concerns remain top of mind, indicates that small businesses are still focused on growing their business as opposed to cutting expenses.  
• With trade conflicts reigniting in March, the level of uncertainty has the potential to rise even higher. This would weigh on overall small business confidence, and is likely to manifest itself in weaker investment and hiring decisions. Additionally, the rise of input costs from tariffs and counter-tariffs may impact pricing plans, with today's survey carrying some evidence of rising price pressures. The Fed will have to weigh these competing forces carefully as it considers adjusting monetary policy. For the time being, we expect the Fed to remain on hold, but come summer we could see chair Powell taking out the interest rate scissors.          

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