At a Glance

  • The National Federation of Independent Business (NFIB) said on Tuesday that small business owners' optimism about the economy declined last month, with the uncertainty index rising to its highest level since October 2020, as inflation concerns persist and the Federal Reserve has signaled plans to cut its benchmark interest rate as early as next week.
  • Citing its monthly survey, the NFIB said the proportion of businesses reporting higher profits fell to its lowest level since March 2010. Inflation—driven by rising labor and input costs—remains the top problem for small businesses.
  • "Main Street sentiment deteriorated in August," NFIB Chief Economist Bill Dunkelberg said in a statement. "Historically high inflation remains the top concern for (small business) owners, with sales expectations plunging and cost pressures rising." He also noted that business owners' pessimism about the business outlook is intensifying.

In-Depth Analysis

Since mid-2023, inflation has followed a bumpy downward path. The Personal Consumption Expenditures (PCE) price index rose 2.5% year over year in July, above the Fed's 2% target and unchanged from June.

Federal Reserve Chair Jerome Powell and other policymakers have said repeatedly in recent months that easing price pressures and a softening labor market have led them to focus more on the other half of their dual mandate—ensuring maximum employment.

"Given the considerable and continued progress toward the central bank's inflation goal, I believe the balance of risks has shifted toward the employment side of our dual mandate, and monetary policy needs to adjust accordingly," Fed Governor Christopher Waller said in a speech last Friday. "I believe it is important to begin the rate-cutting process at the next meeting." The next meeting is scheduled for September 17-18.

Fitch Ratings Chief Economist Brian Coulton noted in a client note on Tuesday that the Federal Open Market Committee (FOMC) may cut borrowing costs at a slower pace than in many previous easing cycles.

"The long-awaited Fed easing cycle is about to begin, but the FOMC will remain cautious after the inflation challenges of the past few years," Coulton said. "The pace of rate cuts will be moderate, and monetary easing will provide only limited support to growth next year."

Policymakers still need to make progress in curbing inflation, Fitch said in its Global Economic Outlook released on Tuesday. Services inflation, which accounts for 75% of core CPI (excluding food and energy), is still running at about 5% annually, "well above the level consistent with overall inflation of 2%."

"The inflation challenge the Fed has faced over the past three and a half years may also keep FOMC members cautious," Fitch said. "Taming inflation took far longer than expected and exposed gaps in the central bank's understanding of inflation drivers."

Fitch forecasts that policymakers will proceed cautiously, with possibly two rate cuts of 25 basis points each this year, five cuts in 2025, and three cuts in 2026, bringing the main interest rate down to 3% by September 2026.

Such a policy path would imply a cumulative reduction of 2.5 percentage points in the benchmark rate over 10 moves within 25 months, Fitch noted. In contrast, in previous easing cycles since the mid-1950s, policymakers have on average cut the main rate by 4.7 percentage points over eight months.

"Our current forecast is significantly below most previous easing cycles in both magnitude and speed," Fitch said.

Small business owners pessimistic about profit prospects mainly blamed weak sales, while also citing higher material prices and labor costs, the NFIB said.

The NFIB has conducted monthly surveys of its members on economic trends since 1986.