Small Business Optimism Softens as Taxes and Labor Costs Weigh

The NFIB Small Business Optimism Index stepped down 0.6 points to 95.3 in May, remaining below the 52-year average of 98. May’s decline was due to a weakening of the labor components, though partially offset by improvements in earnings trends and inventory plans. Of the 10 components included in the index, three increased, six decreased and one was unchanged. Meanwhile, the Uncertainty Index increased 3 points to 91, still well above the 51-year average (68) and above the average since 2016 (80).

Taxes were cited as the top concern for small business owners, with 19% reporting it as the most important problem, up 2 points from April. The share of businesses reporting inflation as the most important problem rose 2 points from April, the highest reading since December 2024, with a net 36% of owners raising prices. Meanwhile, cost of labor ranked third in the list of concerns at 14%, up 5 points and the highest reading in the survey’s history. The share of businesses reporting labor quality as the most important problem fell 5 points from April, with 29% reporting they were struggling to fill jobs and 55% were hiring or trying to hire.

A net 31% of small business owners reported raising compensation, up 1 point in May after moving down 3 points in April. Meanwhile, 18% of business owners plan to increase compensation in the next three months, unchanged from April. Pressure on profitability weakened in May, with positive profit trends rising 4 points from April to a net negative 15%. Among owners reporting lower profits, 32% blamed weaker sales, 16% cited rising material costs, 14% mentioned usual seasonal changes, 9% noted labor costs and 7% mentioned price changes on their products or services. Meanwhile, 4% of owners reported that their last loan was harder to get than previous attempts, up 1 point from April, and a net 6% of owners cited paying a higher interest rate on their most recent loan, up 4 points from the prior month.

The outlook for general business conditions declined 1 point to 3%, the lowest level since October 2024. Furthermore, expectations for better business conditions are down 22 points from May 2025. At the same time, 7% reported that it is a good time to expand their business, unchanged from April and a weak reading compared to times of economic expansion. Overall, small business owners remain relatively pessimistic about the outlook as expected business conditions fell for the fifth consecutive month and to its lowest level since October 2024.