The sentiment index for U.S. small businesses fell to its lowest point since May 2023 in January, according to a report published Tuesday by Reuters. The decline to 89.9 from 91.9 in December represents the largest decrease since December 2022 and keeps the index below its 50-year average of 98 for a 25th-straight month. This drop in sentiment is attributed to labor costs and slowed sales, which have resulted in tight profit margins for business owners.
Labor quality and inflation were cited as the top concerns for business owners in January. As costs continue to rise, the conditions for sales have tightened, with the share of owners reporting profit growth falling to a net negative 30% from a net negative 25% in December. The NFIB’s chief economist, Bill Dunkelberg, stated that small business owners continue to make appropriate business adjustments in response to ongoing economic challenges, and that optimism among small business owners has dropped as inflation remains a key obstacle on Main Street.
While the share of owners citing inflation as their top concern dropped by 3 points to 20%, concerns around interest rates and tightened credit conditions for small business borrowers have tracked with the Federal Reserve’s rate hike campaign. The Fed has signaled that rate hikes are over and it should be in a position to lower rates later this year. On a six-month basis, the portion of owners expecting better business conditions fell 2 points to negative 38%, and the share of owners who expect higher real sales fell 12 points to negative 16% in January.