The NFIB’s Small Business Optimism Index fell 0.6 points to 95.3 in May, disappointing market expectations for a modest uptick to 96.1. The Uncertainty Index rose 3 points to 91, remaining well above its historical average of 68.
Six out of the ten index subcomponents deteriorated on the month, three improved and one remained unchanged. Large pullbacks were recorded among the labor market components, followed by more muted declines in expectations for higher real sales (-2 points to 1%) and the belief that current inventory levels are too low (-2 points to -4%). Earnings trends improved (+4 points to -15%), as did plans to increase inventories (+3 points to 1%).
The net share of businesses planning to increase employment fell a steep 4 points to 9%, while the share of firms with unfilled job openings fell 5 points to 29%, with each indicator now at its lowest level since the start of the pandemic. Quality of labor concerns fell 5 points to 13% – the lowest level since 2016 – but concerns about the cost of labor moved up (+5 points to 14%). Inflation remained the top concern as it continued to edge higher (+2 points to 18% – a notable increase from 12% in February).
The net share of firms currently increasing employee compensation rose 1 point to 31%, while the net share planning to do so over the next three months was unchanged for the third month in a row at 18%. The share of businesses ‘raising’ average selling prices continued to push higher (+6 points to 36%), as did the share of those ‘planning’ to raise average selling prices in the months ahead (+7 points to 34%).
Key Implications
Small business confidence edged lower in May and has now effectively erased nearly all of its gains since late-2024. A renewed buildup in price pressures appears to be a key factor behind the recent (albeit moderate) deterioration in sentiment. The standout in today’s report was the notable upturn in the share of firms both raising and planning to raise average selling prices. At the same time, concerns about inflation remained top of mind as they continued to edge higher – marking a clear departure from their February level before the start of the Middle East conflict.
Labor market indicators were another soft spot in today’s report. While the May payrolls report showed that hiring across the broader U.S. economy remains healthy, signals from the NFIB survey point to a potential slowdown in small business hiring over the near-term. Hiring plans and unfilled job openings both fell sharply, with each now sitting near levels last seen in 2016. At the same time, firms appear increasingly concerned about labor costs rather than labor quality, with the former overtaking the latter for the first time since 2013. Taken together, the report reinforces the view that small and medium-sized firms are likely to make smaller contributions to job growth in the months ahead.
