Quick Read Key Points

  • The National Federation of Independent Business (NFIB) said Tuesday that small business owner optimism rose to its highest level since 2022 in October, although uncertainty about their outlook hit a 51-year high.
  • The NFIB said the proportion of owners expecting sales growth rose to its highest level this year. In its monthly survey results, the group said uncertainty facing small businesses would fade as the November 5 election concluded. NFIB Chief Economist Bill Dunkelberg made that prediction in a statement.
  • Meanwhile, Dunkelberg noted that "small business owners continue to face unprecedented economic headwinds," citing persistent inflation, unfilled job openings, and currently weak sales levels.

In-Depth Analysis

The NFIB said nine of the ten components that make up the optimism index improved, including expectations for business conditions.

Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said in a note to clients Tuesday that the improved prospects of Republican candidates last month may have boosted optimism.

"Small business owners lean Republican, and online betting markets showed that the perceived probability of a Republican victory in the November election rose significantly between September and October," Allen said.

Allen said the four subcomponents of sales, earnings, expansion opportunities, and economic expectations contributed about 70% of the gain in the optimism index.

"These subcomponents tend to surge when political news is favorable to Republicans, such as after Donald Trump's victory in 2016," he predicted a "more substantial surge" in the November index.

President-elect Trump will inherit an economy that has defied recession predictions this year and is growing at a pace well above the 2% trend rate.

Inflation has slowed to near the Federal Reserve's 2% target, and despite interest rates at two-decade highs, the unemployment rate remains relatively low at 4.1%.

"It has to be acknowledged—as of today—the economy looks pretty good," Richmond Fed President Tom Barkin said in a speech Tuesday.

Noting easing price pressures, the Fed cut its key interest rate by 0.25 percentage points on Thursday, following a 0.50 percentage point cut in mid-September.

"With rates coming down and the election behind us, we're seeing employers start to feel more comfortable investing in the future," Barkin said, describing an optimistic scenario for the coming months.

"After shelving recession plans for two years, they're finally putting them back on the shelf," he said. "They believe in the solid demand they keep seeing and are hiring to make sure they meet it. Real wages remain healthy. Workers stay employed and keep spending."

In a pessimistic scenario, businesses lack pricing power and "decide they need to cut costs further to maintain margins," Barkin said. "They turn to layoffs. Workers who lose their jobs, and those worried about losing theirs, pull back on spending. Consumption suffers."

The possibility of severe shocks keeps policymakers vigilant, he said: "In particular, we remain focused on potential risks such as financial market turmoil, positive and negative supply shocks, and geopolitical fragmentation."

The NFIB also noted that high federal spending poses a risk to the economy, mentioning $2 trillion in government borrowing at relatively high interest rates.

"Government spending is growing at nearly twice the rate of consumer spending, and government employment dominates the jobs statistics," the NFIB said. "The economy cannot sustain itself by continuously borrowing to finance growth."