Key Points

  • Uncertainty among U.S. small business owners about the business outlook over the next six months has reached its highest level in the 38 years since the National Federation of Independent Business (NFIB) began tracking the indicator.
  • "Small business owners are more uncertain than ever before," said NFIB Chief Economist Bill Dunkelberg in the monthly survey report released Tuesday, noting that inflation and high financing costs have eroded profits, and "many Main Street owners are beginning to question whether the business environment will improve in the future."
  • The NFIB said the proportion of small businesses reporting inventory increases last month fell to its lowest level since June 2020; the average short-term loan interest rate was 10.1%, up 0.6 percentage points from August, the highest level since February 2001.

Deeper Analysis

Although the Federal Reserve cut its key interest rate by 50 basis points to a range of 4.75% to 5% on September 18, businesses of all sizes will still find it difficult to obtain relief from high borrowing costs in the short term.

Since the day before the Fed's easing policy, the yield on the 10-year U.S. Treasury note, a benchmark for lending rates, has risen from 3.66% to 4.02%, as bond traders scaled back bets on rate cuts amid signs of a stronger economy.

The Atlanta Fed on Tuesday raised its third-quarter economic growth estimate to an annualized 3.2%, up from the previous 2.5% (as of October 1 data).

This more optimistic estimate follows a Labor Department report on Friday: U.S. employers added 254,000 jobs last month, far exceeding expectations, the largest increase since March. The September unemployment rate fell to 4.1% from 4.2% in August and 4.3% in July.

The surge in employment has also prompted some economists to predict that the Fed will scale back or abandon further rate cuts this year, even though central bank officials projected last month that the federal funds rate would fall to 4.4% by December and to 3.4% by the end of next year (according to theirmedian forecast）。

"We believe the rest of the year will be 'on hold,'" said Ed Yardeni, president of Yardeni Research, in a research note to clients, noting that GDP growth is "solid" and "there is no urgent need for the Fed to ease, especially if the economy continues to perform well."

Torsten Sløk, chief economist at Apollo Global Management, said Monday that strong corporate spending on artificial intelligence, high government spending, and "consumers and businesses being less sensitive to Fed rate hikes (due to locked-in low rates)" have supported economic growth.

"Now the Fed is cutting rates, which further drives growth and inflation. Combined with very loose financial conditions, the bottom line remains that rates will stay higher for longer," he said in a note to clients.

Over the past week, interest rate futures traders have sharply reduced the probability of a 50-basis-point rate cut by the Fed at its next meeting on November 6-7 from 37% to zero (according to theCME FedWatch tool). They see an 87% probability of a 25-basis-point cut.

After bringing inflation near its 2% target, policymakers have in recent months focused more on their second mandate of ensuring maximum employment.

However, Yardeni said multiple forces could reignite inflation, including wage increases for dockworkers, higher energy prices due to the Israel-Iran conflict, and the costs of rebuilding after Hurricane Helene and other catastrophic storms.

"If services inflation remains sticky and goods inflation heats up, the Fed's 'mission accomplished' 50-basis-point cut on September 18 may prove premature," he said.

The NFIB said inflation remains the top challenge for small businesses, with 23% of businesses surveyed last month citing price pressures (higher input and labor costs) as their most difficult problem.