Key Points at a Glance:

  • The National Federation of Independent Business (NFIB) said Tuesday that small business owner optimism declined in February, with the share of owners who think it is a good time to expand falling 5 percentage points to 12%, the largest drop since April 2020, early in the pandemic.
  • With inflation persistently above the Federal Reserve's 2% target, the share of small businesses raising average selling prices saw its largest monthly increase since April 2021, and the third-highest increase since the monthly survey began in 1986.
  • "Uncertainty on Main Street is high and rising for many reasons," NFIB Chief Economist Bill Dunkelberg said in a statement. "Inflation remains the top issue."

In-Depth Analysis:

Small businesses contribute 43% of U.S. economic growth, and last month they pulled back on hiring and capital expenditure plans, "which is consistent with the overall tone in the financial media," the NFIB said.

"The economy is still growing, but at a slower and slower pace—storm clouds are gathering," the NFIB said.

Several economists, including those at The Conference Board and Bank of America, have recently warned that the Trump administration's tariffs, immigration policies, and other policy shifts could weigh on growth and boost inflation.

Tariff-related costs and price increases "could impact imported products and materials used for resale and manufacturing, as well as exports of products overseas," Mark Valentino, head of commercial banking at Citizens Bank, said in an email.

Additionally, "immigration policy is closely tied to labor costs, and small businesses are cautious on that front as well," he said after the NFIB survey results were released. "Business owners are reassessing supplier contracts, their workforce, and borrowing strategies."

Consumers are also adapting to the new policy environment, cutting spending in January. Last month, both consumer and business confidence declined.

The New York Fed said Monday that U.S. households' pessimism about their financial situation over the next year intensified in February compared with January, with "expectations for unemployment, delinquencies, and credit access deteriorating notably."

Consumers' expectation of unemployment—the probability that the unemployment rate will rise over the next year—jumped 5.4 percentage points to 39.4%, the highest level since September 2023, the New York Fed found in its monthly survey.

Meanwhile, the share of households expecting their financial situation to worsen over the next year rose to 27.4%, the highest since November 2023, according to New York Fed data.

Weak household and business confidence data, along with signs of slowing growth, prompted the Atlanta Fed to abandon its February 19 forecast of 2.3% annualized growth for the first quarter. The bank now expects the economy to contract by 2.4% in the first quarter.

Among small businesses, sentiment went from pessimism in October, to optimism after the election in December, to the current bleak outlook, the NFIB said.

"Small business owners have experienced an uncertainty shock over the past four months," the NFIB said in a commentary.

Despite inflationary pressures, 38% of small businesses reported difficulty filling job openings, up 3 percentage points from January, the highest level since August 2024. They see labor costs as the biggest challenge.

"On Main Street, compensation will continue to pressure owners to raise prices, which is not good for the fight against inflation," the NFIB said. "Raising pay is necessary to maintain current employment levels and hopefully fill openings."

The survey also showed some bright spots. Last month, only 3% of respondents cited financing and interest rates as their top business problem, unchanged from January.

"Overall, credit markets remain friendly to small businesses," the NFIB said.