Small-Business Optimism Slips to 97.9 as Loan Rates Climb

A small drop with a lot underneath it

Small-business sentiment fell back below its long-run norm in September, and the details of the survey look worse than the headline number. The National Federation of Independent Business said its Small Business Optimism Index fell 0.8 points to 97.9. That puts it one-tenth of a point under the 52-year average of 98.0.12 Forecasters had expected a smaller decline, to 98.2, and the result was the weakest since June's 97.4.17 The index had been above its long-term average for two straight months before slipping under it again.3

The index can look calm on the surface. NFIB Chief Economist Bill Dunkelberg described optimism as holding "near the long-term average." He also said owners are moving carefully as they weigh rising costs, higher interest rates and trouble finding qualified workers.13 The softer parts of the survey say more. The NFIB's Uncertainty Index rose 1 point to 90, far above its historical average of 68.13 Over the past few years the optimism index has ranged from a high of 105.1 to a low of 88.5, so September's reading sits near the middle.20 The direction of the forward-looking questions is the more important signal.

Expansion plans fell the most

Coverage of the release agrees on what drove the drop. Only 7% of owners called it a good time to expand, down 5 points from August. The net share expecting better business conditions over the next six months fell 4 points to 6%.13 That was the second monthly decline in a row for the business-conditions measure and its lowest level since May.3 NFIB said these two measures did the most to pull the index down.14

One summary got this backwards. An economist's note said six of the ten components improved and three got worse.11 NFIB's own report says the reverse: three rose, six fell and one was unchanged.14 Wire and trade coverage follows NFIB's count.39 The breadth of the decline is a main reason September matters, so the correct count is worth stating plainly.

The gains were small. Expected real sales rose 3 points to a net 9%, inventory plans rose 1 point, and hiring plans held at a net 17%.3 Owners' views of their own businesses moved down sharply. The share rating their business "good" fell 9 points to 48%, and the share rating it "fair" rose 7 points to 35%.13 Earnings trends were a net -20%. Among owners whose profits fell, 34% blamed weaker sales and 24% blamed rising material costs, up 6 and 8 points.14 Poor sales was the top problem for 11% of owners, the third monthly increase in a row.13 One Ohio service-business owner said customers are unsure about their finances and are starting to spend less.8

Costs: inflation is back as a top worry

The biggest change on costs is that inflation is again near the top of owners' concerns. One in five owners named inflation as their single most important problem, up 4 points in a month. The historical average is 7%.13 A year ago the figure was 14%.3 One account ties the pressure partly to energy costs, which have stayed high during the wars in the Middle East and between Russia and Ukraine.1 NFIB's own analysis also points to rising fuel and energy costs.15

Owners are passing those costs on. A net 31% raised average selling prices in September, far above the historical norm of 14%. Another net 31% plan to raise prices over the next three months, up 3 points.13 One analysis notes that the share of firms raising prices so far in 2026 is the highest since 2023.11 A Wisconsin manufacturer quoted by NFIB said fuel and raw materials cost too much and skilled workers are hard to find.13

Minimum wage increases are coming, but owners rank them low

On labor costs, the survey points in two directions. Labor quality or availability was the top problem for the third month in a row, cited by 26% of owners, which is 14 points above its historical average.13 Yet only 6% named labor costs as their biggest problem. That is the lowest share since December 2020.14 A net 28% of owners raised pay in September, down 3 points. A net 20% plan raises over the next three months, the most since February.3

That gap matters because a new round of state minimum wage increases begins in January. Michigan goes from $13.73 to $15.00, Rhode Island from $16.00 to $17.00 and Virginia from $12.77 to $13.75.22 California rises to $17.40, Connecticut to $17.48 and Washington to $17.73.22 Several large cities will also raise their local minimums, including Seattle to $22.14 and Minneapolis to $17.02.22 New Jersey moves to $16.48 for most employers and $16.25 for seasonal and small employers.21 Some laws give the smallest firms more time. In Saint Paul, businesses with five or fewer workers move to $14.25 in January and $15.00 in July.22 The federal minimum stays at $7.25, with no increase announced.21

My reading is that owners are not ignoring wages. Finding workers is simply the bigger problem right now, and pay above the legal floor is already set by competition for scarce staff. Among owners trying to hire, 87% said they found few or no qualified applicants.13 In many places that competition has probably already pushed pay above the new minimums. The bigger risk is in states with large one-time jumps, like Michigan and Virginia, where the January increase lands on top of higher input costs and weaker sales. The survey shows margins are already thin. A required wage increase could push more owners to raise prices, at a time when a growing number say customers are pulling back.

Lending: rates rose and fewer owners are borrowing

September also showed the first effects of the Federal Reserve's change in direction. On September 16 the Fed raised its target range by a quarter point to 3.75%–4.00%, its first increase since July 2023. Most officials expect another hike this year. The prime rate rose to 7.00%, and SBA 7(a) rate caps rose by the same quarter point.32 NFIB said in its commentary that market rates followed the Fed and that small-business borrowers reported higher rates on recent loans.13

The survey numbers show it:

• A net 8% of owners paid a higher rate on their most recent loan, up 4 points and the most since June 2025.14
• The average rate on short-term loans rose 0.7 points to 8.2%, close to the historical average of 8.3%.14
• Only 22% of owners borrow regularly, tied for the lowest since November 2021 and well below the historical average of 34%.3
• Just 3% named financing and interest rates as their biggest problem.14

Put together, rates are rising, but most small firms are not borrowing enough for that to be their main complaint.

Banking analysts focus on what this means for loan demand. The American Bankers Association's economists said slower expansion plans could reduce demand for small-business credit. They also said continued inflation and labor costs could squeeze margins and owners' ability to repay debt, which could cool commercial lending.16 Another analysis made a similar point: when fewer owners plan to expand, fewer buy equipment, vehicles or store upgrades, and banks that lend heavily to small businesses could see slower loan growth.10

Bank surveys are mixed, and most of them were taken before the September hike. The Fed's July survey of loan officers showed net demand for small-business loans at +3.6%, compared with -27.9% a year earlier. Most of that improvement came from large banks.31 The Kansas City Fed's survey for the second quarter showed new small-business loan balances up 8.5% from a year earlier. In the same survey, banks said credit standards had tightened, credit quality was still declining, and nearly 70% expected inflation to hurt loan demand.35 The New York Fed's October Beige Book report, which is more recent, said small and midsized banks saw lower demand for business loans and slightly tighter standards. I put more weight on the newer data. The rebound in loan demand earlier in the year looks like it is ending as rates rise.

What comes next

NFIB's commentary sounds more upbeat than its own data. It credits strong consumer spending and stock-market gains with supporting sales and profits.13 The owners themselves reported weaker earnings, lower ratings for their own businesses, and more cases of poor sales as their top problem.14 One analysis said markets expect the Fed to raise rates further in the coming months.11 The Fed's next meeting is October 28.32

The overall direction is clear even though the index barely moved. Costs are rising, borrowing is getting more expensive, hiring is still hard, and January brings required wage increases in many states. Owners are responding by putting off expansion and investment, and those decisions usually lead to slower hiring and spending later. As one state NFIB director put it, owners want confidence that sales will cover added costs before they expand.6 Right now, few of them have it.