Biggest Drop In Small Business Sentiment Since 2015

After hitting multi-decade highs in February, optimism on the part of small businesses pulled back a fair amount in March. While economists were expecting the headline index to see a slight pullback to 107.0 from last month’s reading of 107.6, the actual decline was much larger as the index dropped to 104.7. With a m/m decline of 2.9 points, this month’s drop was the largest drop since 2015. In terms of the report’s reading relative to expectations, however, we actually saw a bigger miss back in January with the release of the December 2017 report.

Even with this month’s decline, however, we would note that sentiment on the part of small businesses remains positive and is well above the historical average reading of 96.6. Also, as noted in the report, of the 432 historical monthly readings, only 20 have been higher than this month’s level.

In terms of the biggest problems facing small businesses, the table below summarizes this month’s breakdown. Topping the list once again this month is Quality of Labor which received 21% of the votes. That’s a high reading, but it’s actually down from February’s reading of 22%. Falling further and further down the “problems list” is Govt Red Tape and Taxes. While markets have grown increasingly concerned about price pressures in the last couple of months, small business owners aren’t seeing it yet as only 1% cited inflation as their number one problem, and that’s down from 2% last month.

In the case of Taxes, the percentage of businesses citing that issue as their biggest problem has plummetted ever since the Tax Reform bill was signed into law. According to the NFIB, it hasn’t been cited by this few a percentage of businesses since 1982!

Inflation may not be a big concern at this point for small businesses, but with issues arising regarding labor quality and costs, that could very well lead to higher wages and ultimately higher prices. As shown in the chart below, 29% of small businesses cited either quality (21%) or costs (8%) as their number one problem this month. That’s the highest level in at least a decade.