Small Business Optimism Slips to 97.9 as Uncertainty Climbs

A small dip with bigger warning signs underneath

America's small business owners became a little less confident in September. Underneath that modest change, the details point to more strain than the headline number shows. 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 below the survey's 52-year average of 98.0.13 Over the same period, the group's Uncertainty Index rose a point to 90, far above its historical average of 68.12

The reading also missed expectations. Forecasters had looked for 98.2, and the September figure was the weakest since June, when the index stood at 97.4.14 The index had been above its long-term average for two months and has now fallen back below it.14

NFIB's own officials played down the move. Chief economist Bill Dunkelberg said optimism had stayed close to its long-term norm. He described owners as moving carefully while they work out how higher costs, interest rates and hiring problems are affecting their businesses.13 Holly Wade, the group's executive director of research, said optimism was in an "OK place" overall. She noted that consumers and businesses were still spending and investing.20

Both statements are accurate, but they leave out a lot. A close look at the components shows small business owners who are not in crisis but are steadily losing confidence in their own operations, their costs and their plans to grow.

What fell, and why it matters

Six of the index's ten components declined in September.14 Two of them drove most of the drop. The share of owners who think now is a good time to expand fell five points to 7%. That ties April and May for the lowest reading since October 2024.14 A net 6% of owners expect business conditions to improve over the next six months, down four points. It was the second monthly decline in a row, although the figure is still above its historical average.11

The most notable change was in how owners rate their own businesses. The share calling their business's health "good" fell from 57% to 48% in one month, and the share calling it "fair" rose from 28% to 35%.19 Wade called this a "significant deterioration" and said it deserves watching in the coming months.19 Only 4% of owners described their business as poor, and 13% called it excellent, so the problem is not distress.19 Instead, a large group of owners moved from comfortable to merely getting by.

This shift matters because owners' views of the economy depend partly on news and politics, while their views of their own businesses reflect their actual results. When a nine-point drop shows up in that self-assessment, it suggests weaker optimism is starting to appear in day-to-day finances.

The profit data supports that view. Among owners who reported lower profits, 34% blamed weaker sales and 24% blamed higher material costs. Those shares rose six and eight points respectively.14 Poor sales was the top problem for 11% of owners, the third straight monthly increase.11

Costs: fuel, inflation and the Iran war

Costs dominate the September survey. Inflation rose four points to become the top problem for 20% of owners, putting it second overall and far above its historical average of 7%.12 NFIB said owners are still adjusting to higher fuel, energy and other costs.12

Energy appears to be the main cause. Wade attributed much of the price pressure to higher energy costs. AAA figures put average gasoline at $4.34 a gallon and diesel at $6.28, compared with $2.98 and $3.76 just before the war with Iran began.19 Wade said optimism suffered as owners gave up hope that fuel prices would fall quickly.19 Owners quoted by NFIB said the same thing in their own words. A Wisconsin manufacturer complained about high fuel and raw material prices. An Ohio service business said customers were worried about their finances and starting to spend less.13

Owners are passing some of these costs on to customers. A seasonally adjusted net 31% of owners raised average selling prices in September, unchanged from August and well above the historical average of 14%. A net 31% plan further increases.19 For policymakers, this matters: small firms are not just absorbing inflation but adding to it.

Tariffs add to the pressure for some businesses. Danny Reynolds, who runs an Indiana clothing store, said his bridal business depends on imported merchandise. He has tried to absorb higher costs rather than raise prices sharply.19 State directors described a similar picture. Wyoming's NFIB director said owners operate on thin margins and are reluctant to make large investments while costs keep rising.18 Iowa's director cited higher operating costs and growing doubts about whether this is a good time to invest.15

Lending: rates move higher

Borrowing costs are a smaller part of the story so far, but they are moving in the wrong direction. A net 8% of owners said they paid a higher interest rate on their most recent loan. That is up four points and the highest share since June 2025.13 The average rate on short-term loans rose 0.7 points to 8.2%, close to the historical average of 8.3%.15

NFIB's commentary connected the increase to monetary policy. It said the Federal Reserve raised its policy rate as expected, market rates followed, and small business borrowers saw higher rates on new loans.14 With the prime rate at 7.00% in October, SBA 7(a) loans can be priced at 10.00% to 13.50% at their legal maximums.8 Long-term fixed SBA 504 rates range from about 6.30% to 6.97% depending on term and sector.5 Expected credit conditions fell one point to a net -3%.14 Financing and interest rates were the top problem for only 3% of owners.14

The contrast is telling. Owners are not short of credit, and very few name financing as their biggest worry. What they lack is a reason to borrow. The American Bankers Association's chief economist's office reached the same conclusion. It said weaker expansion plans could reduce demand for small business credit, and that continued inflation and labor costs could squeeze margins and owners' ability to repay debt. For banks, it said, this could hold down commercial loan demand.16 In my reading, the main lending risk is lower demand, not a shortage of supply. Owners who see no good time to expand will not take on new debt at 8% or more.

Capital spending plans support that interpretation. Plans for capital outlays fell two points to 22%.14 Among owners who made purchases, spending on new equipment fell four points to 32%. Spending on improving or expanding facilities rose four points to 16%.14

Labor is still the top problem

Rising costs are the newer story, but finding workers remains the most common complaint. Labor quality was the top problem for the third month in a row, cited by 26% of owners, up three points.12 About 32% of owners had job openings they could not fill. Among owners hiring or trying to hire, 87% found few or no qualified applicants.15

Wade said the shortage is most severe in construction and manufacturing. She added that small firms are being outbid for electricians, plumbers and HVAC technicians by large companies building data centers and AI infrastructure.19 NFIB's commentary separately said the AI boom has done little to change the overall jobs picture.14 Taken together, these points suggest the AI investment wave helps the broader economy while taking skilled tradespeople away from Main Street.

The employment data is softer. The NFIB Employment Index fell 1.2 points to 100.6, below its 2025 average of 101.2.12 Actual employment changes over the past three months remained at a net -7%, the weakest since June 2025.14 A net 28% of owners raised compensation, the lowest share since November 2025.14

How the coverage differs

The reporting agrees on the numbers. The differences are in emphasis. NFIB's national materials and the coverage based on them describe a mild decline near the historical average.1112 Market coverage stressed that the reading missed forecasts and fell to a three-month low.14 State directors in Iowa and Wyoming spoke more in terms of pressure on owners.1518 The ABA was the only source to explain what the data means for lenders.16 Individual owners varied too: Reynolds described himself as "cautiously optimistic" and pointed to strength in parts of his business.19

I side with the cautious reading. The overall index is not alarming. But the combination of falling expansion plans, a sharp decline in owners' ratings of their own businesses, rising profit pressure from sales and materials, and higher borrowing costs points to a sector that is preparing for trouble rather than investing in growth. NFIB itself expects consumer spending and AI investment to keep the economy growing through year-end. It also lists the midterm elections and the Iran war as major unresolved risks.14 If fuel prices stay near current levels into the holiday season, the uncertainty index, already 22 points above its historical average, may say more about where small business is heading than the optimism index does.