The NFIB Small Business Optimism Index declined 0.8 points in September to 97.9, one tenth of a point below the 52 year average of 98.0, according to the report released this morning. That modest decline carries symbolic weight, because it ends a summer run that saw the index jump to 99.8 in July, the highest since August of last year, before slipping to 98.7 in August. The Uncertainty Index rose 1 point to 90, remaining well above the historical average of 68. The forward looking components did most of the damage. A net 6% of owners expect better conditions in the next six months, down 4 points from August, while only 7% reported that it is a good time to expand, down 5 points. Owners also turned more downbeat on their own operations, with 35% rating their business fair, up seven points, and 48% rating it good, down nine points. The headline is not alarming, but the direction of travel in expectations is.
The problem list tells a story of cost pressure colliding with softening demand. Labor quality or availability rose 3 points to 26% as the single most important problem, the top issue for the third consecutive month, while inflation was second at 20%, up 4 points from August against a historical average of 7%. Pricing behavior remains far from normal: a net 31% of owners reported raising average selling prices, well above the historical average of net 14%, and a net 31% plan increases over the next three months, up 3 points. Yet that pricing activity is not translating into healthier margins. Earnings trends slipped to a net negative 20%, and among owners reporting lower profits, 34% blamed weaker sales (up 6 points) and 24% cited rising material costs (up 8 points). Poor sales as a top problem rose for the third consecutive month to 11%, while taxes fell 5 points to 11%, the lowest since December 2022. Investment is following sentiment lower, as both actual and planned capital expenditures declined and stayed below their 52 year averages. One offsetting signal: owners expecting higher real sales volumes rose 3 points to a net 9%.
The macro backdrop explains much of the caution. The Federal Reserve raised its benchmark rate by 25 basis points to a range of 3.75% to 4.00% on September 16, its first increase since July 2023, on a unanimous vote, and the median projection implies one more hike this year. The tightening came as the energy shock stemming from the war with Iran continues to weigh on the outlook, with headline inflation at 3.4% year over year in August and core at 2.4%. Oil surging above $100 a barrel lands hard on small firms that run delivery fleets, buy freight, and lack the pricing scale of large competitors. Borrowing costs are already moving through to Main Street: a net 8% of owners reported paying a higher rate on their most recent loan, up 4 points and the highest since June 2025, with short maturity loans averaging 8.2%. NFIB’s own commentary is still constructive on the aggregate economy, arguing that consumer spending and the AI boom will help keep growth healthy for the rest of the year, but it also notes the AI buildout is not labor intensive and has done little for small business hiring.
The core tension is that small businesses are simultaneously a reason for the Fed’s hawkishness and a casualty of it. A persistent net 31% of firms raising prices is exactly the kind of broad based price setting behavior policymakers point to as evidence that inflation is not yet contained, and it helps justify further tightening. At the same time, higher rates, elevated fuel prices, and slowing sales are compressing margins at the firms least able to absorb them. The labor picture is cooling at the edges without relieving the core shortage: 51% of owners were hiring or trying to hire, down 5 points, and job openings fell 3 points to 32%, yet 87% of those hiring reported few or no qualified applicants. That combination of tight skilled labor, sticky prices, and weakening demand resembles a mild stagflationary squeeze at the small business level. If profits keep deteriorating, the more likely adjustment is through hiring and investment rather than prices, which would eventually show up in broader employment data.
Several catalysts loom over the next few weeks. The FOMC holds its next meetings in late October and early December, and the September inflation data will shape whether the second hike in the Fed’s projections arrives sooner or later. NFIB flagged the midterm elections and the Iran war as major uncertainties still to be resolved, which aligns with an Uncertainty Index sitting more than 20 points above its long run norm. For investors, small business sentiment has historically been a useful read on small cap equities and on domestically oriented cyclicals, both of which are more exposed to floating rate debt and energy input costs. A sustained move back below the long run average, paired with rising rates, would argue for caution in those areas until the energy shock and the Fed’s tightening path come into clearer focus.
Disclosure
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Facts presented have been obtained from sources believed to be reliable, though Gryphon cannot guarantee their accuracy or completeness. Gryphon does not provide tax, accounting, or legal advice. Individuals should seek such guidance from qualified professionals based on their specific circumstances.