Big Swings for Small Business

Mar 11, 2025

This morning’s release of small business sentiment from the NFIB showed another month-over-month decline in the headline Optimism Index.  The politically sensitive survey has shown that the headline index has managed to remain well above pre-Election levels, though the past two months have marked a dramatic drop.  The index was at a high 105.1 in December thanks to a record increase after the election.  In the two months since then, the index is down 4.4 points, which, as shown in the second chart below, makes February the 10th largest 2-month decline on record.

In the table below we show the readings for each category of the report including the 10 inputs to the optimism index in addition to the eight other indices.  As shown, the latest drop has brought the index down from an 85th percentile reading to a 66th percentile reading. Breadth was notably weak with only three inputs rising month-over-month while the rest fell. Other categories were mixed with three increases, three declines, and two unchanged readings.

As previously noted, historically the NFIB survey has been sensitive to politics. The survey has shown small businesses to be more optimistic when Republicans are in power whereas sentiment has been weaker when Democrats are in power. As we discussed in today’s Morning Lineup, some categories like labor indicators appear less sensitive. Expanding on this, below we have constructed indices within the report that are centered around observed or actual changes to the businesses (which in theory could be less politically sensitive) and expectations or plans (which would be more sensitive).

As shown, both indices got a boost after the election although plans and expectations saw a significantly larger jump, meaning small businesses’ hopes were perhaps ahead of what was actually happening within their firms.  Just as fast as it rose, that expectations index has pulled back sharply in the past couple of months. As a result, expectations continue to outpace actuals, although to a smaller degree than at the end of 2024.

In addition to the various categories of the report, the NFIB also has an Economic Policy Uncertainty index. This index tends to rise the most during election years, and given we are only a few months out from the election, this index has remained near historically elevated levels.  As shown in the second chart below, the move over the past several months has been extremely volatile. The move in the past two months is similar in size to the two-month period leading up to last fall’s election. Prior to that, the only moves of this size were observed in the summer of 2022 and in early 2016 before that.

Elsewhere in the report, there were other mixed signals which could cause some uncertainty outside of politics.  The higher prices index ticked up meaningfully with a 10-point jump resulting in the highest reading since May 2023. However, the percentage of firms reporting inflation as their single biggest problem has fallen massively to only 16% versus a recent high of 25% last summer.

For the cohort of businesses that reported lower earnings, inflation was the second most common response accounting for 10% of respondents. That is still well below the past few years’ range, and plays second fiddle to sales volumes, which rose to 16% to match last October and November 2023 for the highest reading since March 2021.

Another big move in last month’s report had to do with capex.  While ‘actual changes to capex’ was flat on the month, credit availability rose another point to continue its massive improvement from the past few months.

Perhaps as a result of that greater ease for credit or perhaps to front run any potential tariff impact on the heavily exposed auto industry, we would also note that February saw a historic surge in the percentage of firms reporting capex spend on vehicles.