Small Business Optimism Slips Below 52-Year Average to 97.9

A small drop past a big benchmark

In September, small business optimism in the U.S. fell just below its long-run average. That is a small move numerically, but it says a lot about how owners feel. The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index fell 0.8 points to 97.9. That is one-tenth of a point under the 52-year average of 98.0.1 The reading came in under the consensus estimate of 98.2. It was the lowest since June, and it pushed the index back below the long-term mark after two months above it.2

The headline number alone doesn't show much. The breakdown underneath it shows more. Six of the index's ten components fell, three rose and one held steady.2 Two components drove most of the decline: worse expectations for business conditions, and fewer owners who think now is a good time to expand.5 Only 7% of owners called the next three months a good time to grow, down 5 points. That ties April and May for the weakest reading since October 2024.2 NFIB's Uncertainty Index rose 1 point to 90, far above its historical average of 68.6

NFIB Chief Economist Bill Dunkelberg said owners are moving carefully as they work out how rising costs, interest rates and the struggle to find qualified workers are affecting their businesses.3

Inflation is back near the top of the list

The sharpest change in the survey is how owners describe their biggest problem. Twenty percent named inflation as their single most important issue, up 4 points in a month and far above the historical average of 7%.13 A year ago the figure was 14%.2

The broader economic data explains why. Consumer prices rose 3.7% in the year through September, up from 3.4% through August. Gasoline jumped 9.1% in the month and accounted for more than half of the monthly increase.10 Small business owners felt this directly. A Georgia retailer told NFIB that fuel costs on delivery trucks and freight surcharges were "killing" the business, and also cutting into customers' spending money.12 CFO Dive tied the recent pressure to war-driven inflation and an immigration crackdown that has disrupted hiring.12

Owners are passing the costs on. A net 31% raised average selling prices, the third month in a row at that level and far above the historical norm of 14%. A net 31% also plan more increases over the next three months, the highest share since June.2 Profits are still under strain. Among owners reporting lower earnings, 34% blamed weaker sales and 24% blamed rising material costs. Those shares rose 6 and 8 points.2

Other surveys agree on inflation even when they disagree on overall mood. In the third-quarter Justworks and U.S. Chamber of Commerce Small Business Index, 54% of firms named inflation as their biggest challenge. That made it the top issue for a third straight quarter.19 The Small Business & Entrepreneurship Council (SBE Council) found that 81% of owners worry about inflation over the coming year, up from 73% in February. Gasoline and energy costs jumped to the No. 2 concern.17

Hiring trouble, and a minimum wage paradox

Labor quality or availability was owners' top problem for the third month running. It rose 3 points to 26%, compared with 18% a year ago.2 About 32% of owners had job openings they couldn't fill. Among the 51% trying to hire, 87% reported few or no qualified applicants.9 Actual employment over the prior three months stayed at a net -7%, the weakest since June 2025.2

One detail matters for the minimum wage debate. Only 6% of owners named labor costs, as opposed to labor availability, as their top problem. That is the lowest share since December 2020.2 The share of owners raising pay also fell 3 points to a net 28%. However, a net 20% plan raises over the next three months, the most since February.2

That cost line is about to rise. California's minimum wage goes from $16.90 to $17.40 on January 1, Connecticut's goes to $17.48, and Michigan's jumps from $13.73 to $15.00.22 Washington's rises 3.5% to $17.73, based on a consumer price index formula. Last year's increase was 2.8%, so the bigger step reflects this year's faster inflation.2526 Virginia goes to $13.75 in January and $15 in 2028.21 Seattle employers will pay $22.14.26 Not every state is raising its floor. New York's rates stay flat on January 1 because a condition in its law that pauses scheduled increases was triggered.29 The federal minimum is still $7.25.21

We expect these increases to push labor costs back up owners' list of concerns in the first half of 2027. That is especially likely in states that tie the wage to inflation. In those states, the price pressure owners already report gets built into the next year's payroll automatically.

Credit is getting pricier, and owners are borrowing less

The lending side of the report shows the clearest policy effect. The Federal Reserve raised its target range by a quarter point in September, to 3.75%–4.00%.10 NFIB said market rates followed.2 The average rate on short-term small business loans rose 0.7 points to 8.2%. A net 8% of regular borrowers said they paid more on their latest loan, the highest since June 2025.3

Fewer owners are taking on debt. Only 22% borrow regularly, tying the lowest share since November 2021 and well below the historical average of 34%.2 Planned capital spending fell 2 points to 22%.5 The American Bankers Association's economists warned that slower expansion plans could reduce demand for small business credit. They added that ongoing inflation and labor costs could squeeze margins and owners' ability to repay debt.6

Banks were already cautious. In the Kansas City Fed's second-quarter survey, banks on net reported tighter credit standards and continued declines in applicant credit quality, a trend that started in 2022. Approval rates fell for small banks.16 Nearly 70% of banks expected inflation to hurt loan demand over the next year.16 There are signs of strain as well: banks of all sizes reported rising use of credit lines for the 11th quarter in a row. Most cited local or national economic conditions and changes in borrowers' revenue as important reasons.16

Business credit cards as the fallback

When owners don't take term loans, many turn to plastic. WalletHub, citing the Fed's Small Business Credit Survey, reports that 62% of businesses used credit cards for funding, compared with 44% that used loans. It also says business card interest rates rose about 32% between 2016 and 2026.31 Current ongoing APRs on major business cards generally run from the high teens to nearly 29%.3637 Bankrate's weekly national average for credit card rates has edged up since early September, reaching 19.67% by mid-October.

Business cards also carry a structural risk. WalletHub notes that business cardholders lack the consumer-card protection that bars issuers from raising rates on existing balances until a payment is 60 days late. That means owners who finance operations on cards can't be sure what their debt will cost.31 We see this as the hidden risk in the current cycle. Owners shut out of tighter bank credit may cover rising inventory and payroll costs with variable-rate cards, just as rates go up.

Where the surveys disagree

Not every survey describes a struggling Main Street. The SBE Council's October survey found that 81% of owners were meeting or beating their 2026 financial expectations, and 61% reported better performance than in 2025.17 The U.S. Chamber's index rose to 70.5 from 66.5, just under last year's record.19 Even NFIB's own data has bright spots. Expected real sales rose 3 points to a net 9%, and hiring plans held at a net 17%.2

The surveys differ in method and sample. NFIB's report drew 411 usable responses from its membership.5 Still, they agree on direction even where they disagree on the level. The Chamber found that every forward-looking measure (revenue, staffing and investment) sits well below last year.19 The SBE Council found that 54% of owners say a lack of capital is holding back growth, up from 43% in February.17

The overall picture is of businesses that are doing fine today but bracing for a harder stretch. Owners are raising prices, holding off on investment, borrowing less and waiting on the midterm elections and the Iran war, both of which NFIB flagged as major unresolved uncertainties.2 Falling 0.1 point below the long-run average is not a recession signal by itself. Taken together, though, rising loan rates, persistent inflation and the minimum wage increases due in January add up to tightening margins. That suggests the next few readings are more likely to slip further than to recover. The next NFIB release is due November 10.11