US Small Business Confidence Drops, Economic Outlook Dims

The NFIB Small Business Optimism Index has fallen to 97.4, just below the 51-year average of 98. This decline is a stark reminder of the challenges facing small businesses in the United States. The implementation of new policy priorities has heightened uncertainty, leading to scaled-back expectations on sales growth. Small business owners are grappling with a myriad of issues, from taxes to labor quality, and the economic outlook is increasingly dim.

The Uncertainty Index, which measures the level of uncertainty among small business owners, decreased by eight points in March to 96. However, this followed a February reading of 104, the second-highest on record. This prolonged uncertainty is a direct result of new policy priorities that small businesses are struggling to navigate. The net percent of owners expecting better business conditions fell 16 points from February to a net 21%, marking the third consecutive monthly decline and the largest monthly decline since December 2020.



The percent of small business owners reporting taxes as their single most important problem rose two points from February to 18%. This is the highest level since November 2021. The number of owners reporting "Taxes" as their top small business issue has not been this high since November 2021. This resurgence in tax concerns is a clear indication of the financial strain that small businesses are under.

The net percent of owners expecting higher real sales volumes fell 11 points from February to a net 3%. This is the third consecutive month that real sales expectations have declined after surging from recession levels after the election. This decline in sales expectations is a worrying sign for the broader economy, as small businesses are a key driver of economic growth.

Labor quality remains the top issue for small business owners, with 19% reporting it as their single most important problem. This is unchanged from February and remains the top issue, with taxes just one point behind. The percent of small business owners reporting labor quality as the single most important problem for their business was unchanged from February at 19%, remaining the top issue, with taxes just one point behind.

The net percent of owners raising average selling prices fell six points from February to a net 26% seasonally adjusted. This is the largest monthly decrease since December 2022, but still historically high. Seasonally adjusted, a net 30% plan price hikes in March, up one point from February and the highest reading since March 2024. This indicates that small businesses are still feeling the effects of inflation, despite the recent decline in price hikes.

The net percent of owners reporting inventory gains improved three points from February to a net negative 11%. This is a slight improvement, but it still indicates that small businesses are struggling to manage their inventory levels.

The economic outlook for small businesses is increasingly dim, and this has implications for broader economic indicators such as GDP growth and employment rates. The decline in small business optimism and persistent uncertainty indicate a cautious outlook. Reduced sales expectations, constrained hiring, and elevated input costs suggest moderated GDP growth as businesses scale back investments and expansion plans. Meanwhile, employment growth is likely to slow despite labor shortages, as firms hesitate to commit to new hires amid economic uncertainty.

The current economic outlook for small businesses suggests potential headwinds for broader economic indicators like GDP growth and employment rates. The decline in small business optimism and persistent uncertainty indicate a cautious outlook. Reduced sales expectations, constrained hiring, and elevated input costs suggest moderated GDP growth as businesses scale back investments and expansion plans. Meanwhile, employment growth is likely to slow despite labor shortages, as firms hesitate to commit to new hires amid economic uncertainty. Key risks include further tax increases, unresolved labor quality issues, and inflationary pressures, which could further dampen both GDP and employment trajectories.