Small business optimism dims in March

Summary

Three makes a trend

The NFIB Small Business Optimism Index declined for the third consecutive month in March, dipping 3.3 points to 97.4. Although optimism remains above its level preceding the 2024 election, the index is now back below its historical average. Small firms’ economic outlooks continue to deteriorate, with dimming economic perceptions and worsening sales expectations as the driving force behind March’s decline. Labor quality remained small firms’ top reported problem as the worsening macroeconomic backdrop spurred a retrenchment in hiring plans. There was little evidence that tariff policy produced an increase in prices in March. However, the percent of firms planning to raise prices over the next few months reached the highest share in 12 months.

Tariffs cloud small business outlooks

• Small business sentiment continued to decline in March. The NFIB Small Business Optimism Index fell 3.3 points to 97.4 during the month, the third consecutive drop that brought the index back below its historical average of 98.

• The uncertainty index, which captures the percentage of firms answering “uncertain” or “don’t know” to at least six survey questions, dipped eight points in March but remained highly elevated at 96. For context, this index has averaged 80 since 2016.

• Economic outlooks remain positive on net but continued to moderate. The net percent of small firms expecting the economy to improve over the next six months dropped 16 points from 37% in February to 21% in March. Sixty-four percent of firms owners rated their business as good or excellent, a slight dip from 66% in February.

• After rising in February alongside increasing expectations for new tariffs, the net share of firms raising their prices dipped six points in March to 26%. That said, additional inflation pressures appear to be bubbling. The net percent of owners planning to raise prices increased one point in March to 30%, the highest reading in 12 months.

• Job openings ticked up in March as labor quality remained the top problem facing small businesses. The net share of firms with unfilled job openings rose to 40%, the highest reading since last August. Small businesses in the construction, transportation and manufacturing industries expressed the greatest difficulty filling open positions.

• As economic outlooks dimmed, hiring plans dipped 3 points over the month to 12%, the lowest share since April 2024.

• Tight labor market dynamics appear to be stimulating compensation pressures. The net share of firms raising compensation climbed five points to 38%. Plans to raise compensation remained low compared to recent years but also ticked one percentage point higher to 19%.

• Sales expectations trended lower for the third consecutive month as details of tariff policy came into clearer view. A net 3% of firms expected higher sales volumes over the next few months, an 11-point drop from the month prior and the lowest share since below the election in October 2024.

• Elevated uncertainty appears to be constraining capex investment. The net proportion of firms planning capital expenditures over the next three to six months moved up slightly to 21% but remained lower than the prevailing level over the past few years.

• Interest rates paid by small businesses were essentially flat in March as the Fed remained on pause. The net share reporting tighter loan access rose four points to -6%.

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