The National Federation of Independent Business Small Business Optimism Index fell to the lowest level since May 2023 during February.
Wells Fargo Senior Economist Charlie Dougherty and economic analyst Patrick Barley said firms reported seeing improvements in terms of labor availability, while a lower share of firms raised selling prices during the month.
They said expectations for real sales and better credit conditions also notched improvements during the month.
On balance, however, most other components slipped, notably hiring and capex plans, Dougherty and Barley said.
What's more, they said the share of small businesses reporting inflation as the single most important operational problem rose during the month, overtaking labor quality at the top of the list.
They added:
* The NFIB Small Business Optimism Index fell to 89.4 in February. Although confidence has shown signs of improvement at various times, the headline index has mostly bounced around at a level well below the long-term historical average over the past two years
*The lack of meaningful improvement largely reflects ongoing challenges dealing with higher costs for materials, labor and financing. The share of small businesses reporting inflation as the single most important operational problem continues to be elevated and turned up further in February.
Although inflation appears to be subsiding on trend, small businesses still appear to be having difficulties balancing the sharp rise in prices over past several years with slowing sales and uncertain future demand.
* Expectations for real sales notched an improvement during the month, however the subindex is still very depressed relative to recent periods of economic expansion. Lower earnings expectations coincides with a generally dim outlook for the economy.
The share of firms expecting the economy to improve over the next six months, which has trended slightly higher over the past year, edged lower in February and is still close to its recent low point.
* Small firms have seen some improvements recently. For example, labor availability for small firms looks to be getting better. During February, the share of businesses reporting labor quality as a top problem fell to the lowest share since April 2020.
Difficult-to-fill job openings also declined.
* Labor cost pressures appear to be easing as a result. The share of firms raising compensation, both currently and expecting to in the near future, both dipped during the month.
* On the other hand, hiring intentions for small firms sunk to a low not seen since May 2020 during the throes of the pandemic. The drop suggests the labor market may start to lose momentum over the coming months.
* The share of firms which are currently raising prices continues to decline and is now at the lowest reading since January 2021.
Encouragingly, the share expecting to raise prices, which spurted higher over the past several months, pulled back slightly during February.
