Small business optimism remains stable in February as labor factors improve

Small business optimism was almost flat in February over January, with confidence strengthened by declining labor challenges but weakened due to unfavorable reports of company performance and economic impacts.

According to the monthly economic trends report compiled by the National Federation of Independent Business (NFIB), small business optimism dropped less than 1% in February, with measures of confidence progressing and retreating on several fronts compared to January. Small business owners that cited labor quality as their primary challenge declined to 16%, a month-over-month decrease of five points and the lowest score seen on the NFIB’s survey since the early months of the COVID-19 pandemic. Strengthening the broader theme of positive employment trends, only 37% of entrepreneurs carried unfilled job positions into March, a two-point drop from the end of January and the smallest percentage in roughly three years. Additionally, more survey respondents had higher expectations for sales than during the previous month: the number of positive forecasts grew by six points to a net negative 10%.

While these trends were encouraging, others served to suppress small business optimism. The share of small business owners who named labor costs as their primary source of difficulty grew by one point from January to 11%, which the NFIB notes is close to the previous high of 13% seen in December 2021. Fewer survey respondents raised selling prices in February, and pay raises declined to the lowest point since mid-2021. Profit trends remained poor, which entrepreneurs attributed to weaker sales (29%), higher material costs (15%), typical seasonal change (13%), and price change (11%). This reflects nationwide trends of tightening profit margins following normalizations in supply chains and stabilizing demand. While only 21% cited inflation as their top business concern, the issue supplanted labor quality as the most common complaint submitted to the NFIB.

Overall, small business optimism remains below the 50-year average, as it has for more than two years. Nevertheless, the decline seen in February is only marginal and is less severe than the drops seen in the latter half of 2021 and the majority of 2022. Economic confidence among entrepreneurs has been retreating since last fall, falling eight points in the fourth quarter of 2023, according to the U.S. Chamber of Commerce. However, given that this decline directly followed the three-year high achieved during the preceding quarter, the negative trend may be more transient than appearances may suggest. It remains to be seen where the needle indicating small business sentiments will fall for the first quarter, but a cooling should not be seen as alarming unless the effect is more than marginal.