U.S. NFIB Small Business Optimism Index (February 2023)

Maria Solovieva, CFA, Economist | 416-380-1195

Date Published: March 14, 2023

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Small Business Optimism Index rises for the second straight month in February.

  • The NFIB's Small Business Optimism Index eked out a 0.6 point gain, rising to 90.9 in February. The index remains 7.1 points below the historical average. 
  • The biggest driver of the gain was a 5 point improvement in the net percent of owners expecting higher real sales. Meanwhile economic expectations declined by two points giving back some of January's gain. 
  • Fewer owners (-3 points) viewed current inventory stocks as “too low” in February, while a net negative 7% of owners plan inventory investment in the coming months.
  • Fewer small business owners reported that now is a good time to expand, and the percent of firms that have plans to make capital outlays in the next few months remained unchanged. This comes as slightly more businesses (60%) made capital expenditure during the past six months. 
  • The frequency of reports of positive profit trends was a net negative 23% - a 3 point improvement from January. Among the owners reporting lower profits, 23% blamed weaker sales and 23% blamed the rise in cost of materials.
  • Nevertheless, the net percent of owners raising average selling prices decreased 4 points from January to a net 37%.
  • Labor market indicators – released a few days ahead of today's report – were mixed. The share of firms unable to fill positions rose by two points to 47% - the highest point since August 2022. The percent of business owners raising compensation remained unchanged at 46%, while 23% (+1%) of firms are planning to raise it in the next three months. However, the trend in planned hiring remained on the decline with only 17% (-2 points) of owners planning to create new jobs in the next three months. 

Key Implications

  • The Small Business Optimism Index improved in February, following a modest rebound in January. Warmer weather and expectations of stronger real sales helped support the sentiment that remained decidedly downbeat over the past year. As we saw over the past months, rapid demand deterioration makes it harder for firms to continue to raise sales prices, which in turn makes small business owners worry about their ability to keep profits. In addition, more owners are now apply for credit to support operations, but as credit conditions continue to tighten, capex intentions will remain subdued.
  • As we learned of Friday, the labor market remains hot, but there is a limit to how much small businesses can compete. The extent of an increase in unfilled positions so far has been matched by changes in current compensation, but there is a gap with business owners' intentions to raise compensation and this gap is widening. As a result, plans to increase employment remain on the decline, which points to easing in the labor market over the coming months.