The small business Optimism Index maintained a historically solid reading, but took a dip in September, falling 1.3 points to 101.8. September’s figure falls within the top 20% of all readings in the Index’s 46-year history. The survey shows no sign of a recession and indicated continued job creation, capital spending, and inventory investment, all consistent with solid, but slower growth. The Uncertainty Index rose 2 points, revisiting high levels of concern.

“As small business owners continue to invest, expand, and try to hire, they’re doing so with less gusto than they did earlier in the year, thanks to the mixed signals they’re receiving from policymakers and politicians,” said NFIB President and CEO Juanita D. Duggan. “All indications are that owners are eager to do more, but they’re uncertain about what the future holds and can’t find workers to fill the jobs they have open.”

Key findings from September’s index included:
- No Index component advanced, three were unchanged (at good levels), and six declined.
- Reports of rising labor compensation remained historically strong and fewer firms reported raising selling prices, so rising labor costs are still not pushing up inflation on Main Street.
- Twenty-five percent expected credit conditions to remain unchanged or to tighten in spite of two rate cuts by the Federal Reserve. Reported credit market conditions remain among the most supportive in the 46-year survey history.
- The perceived environment for expansion and expected business conditions deteriorated further. Twenty-two percent of owners said it was a good time to expand, down 4 points, while a net 9% expect better business conditions, down 3 points.

The Uncertainty Index has risen 6 points over the past three months, as more owners are unable to make a statement confidently, good or bad, about the future of economic conditions. Tariffs are adversely affecting many small firms, with 30% reporting negative effects in NFIB’s September survey. Owners are more reluctant to make major spending commitments when the future becomes less certain.

“As more owners become unsure, caution will seep into business decisions. In addition to tariff concerns, the Fed’s decision to cut interest rates raised uncertainty,” said NFIB Chief Economist William Dunkelberg. “Perhaps the country will indeed talk itself into a recession, but not anytime soon. The persistence of unfilled job openings and reports of a deficiency of job applicants indicate that there is still substantial economic optimism about the economy on Main Street.”

Fifty-seven percent of owners reported capital outlays, down 2 points from August. Plans to make capital outlays were not energized by the rate reductions. Twenty-seven percent plan capital outlays in the next six months, down 1 point. Plans to invest were strong in manufacturing, 34%, professional services, 33%, and the wholesale trades, 32%.

The net percent of owners reporting inventory increases fell 1 point to a net 0%, indicating that inventory rebuilding which was strong early in the year has slowed to a trickle. The contribution of inventory investment to GDP growth in the third quarter is likely to be minimal as rising uncertainty curbs production. The net percent of owners planning to expand inventory holdings was unchanged at a net 2%, a solid number given weaker real sales expectations. The net percent of owners expecting higher real sales volumes fell 1 point to a net 16% of owners.

Inflationary pressures are fading on Main Street as fewer firms on balance are raising prices. The net percent of owners raising average selling prices fell 3 points to a net 8%, seasonally adjusted, the lowest reading since December 2017. A net 15%, seasonally adjusted, plan price hikes (down 2 points). While 13% reported cutting selling prices, only 1 percent plan to do so. This suggests that most price cutting is an unanticipated, unplanned response to market conditions, a healthy process.

A seasonally-adjusted net 17% plan to create new jobs, down 3 points. Not seasonally adjusted, 18% plan to increase total employment at their firm (up 1 point), and 6% plan reductions (up 3 points). Thirty percent of owners reported few qualified applicants for their open positions (down 3 points) and 20% reported none (down 4 points). Twenty-three percent selected “finding qualified labor” as their top business problem, more than cited taxes or regulations. Reports of higher worker compensation were unchanged at a net 29% of all firms. Plans to raise compensation fell 1 point to a net 18%.

LABOR MARKETS
Job creation was firm in September, with an average addition of 0.10 workers per firm compared to 0.19 in August. Net job creation has faded steadily since February’s 0.52 workers per firm to 0.1, no surprise as “finding qualified workers” to fill job openings hit a record high of 27 percent in August. Finding qualified workers remains a top problem, with 23 percent reporting it as their number one problem, down 4 points from August’s record high. Eleven percent (unchanged) reported increasing employment an average of 4 workers per firm and 7 percent (up 1 point) reported reducing employment an average of 3.9 workers per firm (seasonally adjusted). Fifty-seven percent reported hiring or trying to hire (down 7 points), but 50 percent (88 percent of those hiring or trying to hire) reported few or no “qualified” applicants for the positions they were trying to fill.

CAPITAL SPENDING
Fifty-seven percent reported capital outlays, down 2 points from August. Of those making expenditures, 38 percent reported spending on new equipment (down 4 points), 23 percent acquired vehicles (down 1 point), and 14 percent improved or expanded facilities (down 4 points). Twenty-seven percent plan capital outlays in the next few months, down 1 point. Plans to invest were strong in manufacturing, 34 percent, professional services, 33 percent, and the wholesale trades, 32 percent.

SALES AND INVENTORIES
A net 2 percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months, down 4 points, after averaging about 8 percent for the past 6 months. The net percent of owners expecting higher real sales volumes fell 1 point to a net 16 percent of owners. The Fed’s decision to cut interest rates raised uncertainty, and trade uncertainties have not been resolved.

The net percent of owners reporting inventory increases fell 1 point to a net 0 percent, indicating that inventory rebuilding which was strong early in the year has slowed to a trickle. The net percent of owners viewing current inventory stocks as “too low” was unchanged at a net negative 6 percent, indicating concern about the size of inventory stocks on hand, but not worse than last month. The net percent of owners planning to expand inventory holdings was unchanged at a net 2 percent, a solid number given weaker real sales expectations.

INFLATION
The net percent of owners raising average selling prices fell 3 points to a net 8 percent, seasonally adjusted, the lowest reading since 2017. Seasonally adjusted, a net 15 percent plan price hikes (down 2 points). While 13 percent reported cutting selling prices, only 1 percent plan to do so. This suggests that most price cutting is an unanticipated, unplanned response to market conditions – a healthy process. On balance, inflationary pressures are fading on Main Street as fewer firms on balance are raising prices. This is to be expected in an environment preoccupied with “recession” of some sort and with the recent softness in consumer spending.

COMPENSATION AND EARNINGS
Reports of higher worker compensation were unchanged at a net 29 percent of all firms–a relatively high reading. Plans to raise compensation fell 1 point to a net 18 percent. Overall, the gap between the percent raising prices and the percent raising compensation persisted, indicating that owners are still not passing on higher compensation costs. Twenty-three percent selected “finding qualified labor” as their top business problem, more than cited taxes or regulations. Firms will likely continue to offer improved compensation to attract and retain qualified workers because the only solution in the short term to an employee shortage is to raise compensation to attract new workers, and to train less qualified employees.

CREDIT MARKETS
Two percent of owners reported that all their borrowing needs were not satisfied, down 2 points, revisiting the record low. Thirty percent reported all credit needs met (down 1 point) and 53 percent said they were not interested in a loan, up 1 point. Four percent reported their last loan was harder to get than the previous one. Credit conditions are about as supportive as they have ever been in the 46-year survey history. Thirty percent of all owners reported borrowing on a regular basis (down 3 points). The average rate paid on short maturity loans rose 60 basis points to 6.7 percent. Overall, credit markets have been very supportive of growth and will not likely become an impediment this year with the Fed cutting rates.


COMMENTARY

Mumblings about a coming recession (or at least weaker growth) are becoming more prevalent, and this is contagious. The NFIB measure of uncertainty is edging up, rising 6 points over the past 3 months. This means that more owners are unable to confidently make a statement, good or bad, about the future of economic conditions. As more owners become unsure, caution will seep into business decisions.

Meantime, profit growth reports remain historically high. NFIB’s recently released survey of small business owners on the new tax law (Tax Cuts and Jobs Act, TCJA) found that the tax changes had a very significant impact on small firms, although the expected termination of the changes impacting small firms in 2025 is producing some planning concerns already. Over 80 percent feel TCJA had a significant impact on the economy and over 50 percent reported a positive impact on their business. Sixty-five percent reported a positive impact on their personal tax liability. Twenty-six percent of small business owners who reported tax savings increased spending on employee compensation. An additional 26 percent reported increased spending on business investment and expansion. Tax savings motivated 16 percent of small business owners to hire additional employees and another 20 percent to pay down debt obligations. Twenty-seven percent retained part or all of their tax saving as earnings, the main source of financing for future investment projects.

Small business owners are anxious to have their tax cuts made permanent. The new law provides significant tax relief to most small businesses, addressing one of their most critical issues for operating their business, federal taxes on business income. NFIB’s 2016 Small Business Problems and Priorities survey found that five of the top 10 most severe problems facing small business owners are tax related. The most severe of which is “Federal Taxes on Business Income.” The issue ranks third out of 75 problems with 29 percent of small business owners finding it a critical problem in operating their business. The tax law strengthened the small business sector, easing one of their most critical issues in owning and operating their business.