Small business optimism falls at fastest pace in 5 years: NFIB

Small business optimism is faltering as stock markets are dropping and a range of macroeconomic and policy uncertainties are weighing on the business outlook.

The National Federation of Independent Business (NFIB) optimism index, which measures sentiment among small business owners, fell by 2.1 points in February. The group’s uncertainty index also registered its second-highest reading ever.

The 12 percent of business owners reporting that it’s a good time to invest and expand was down 5 percentage points from January — the largest monthly decrease in five years.

Small businesses are responding to fragile economic conditions by raising their prices, the NFIB survey shows. The percentage of owners raising prices increased by 10 percent in February to the highest level in about four years while the share lowering prices decreased by 10 percent.

The drop in sentiment among business owners mirrors a February drop in consumer sentiment.

The University of Michigan reported consumer feelings sliding by 10 percent from January. Expectations for both personal finances and the near-term economic outlook declined about 10 percent while longer-term expectations among consumers pulled back by 6 percent.

Consumers pulled back substantially on their spending in January, with personal consumption expenditures decreasing by $31 billion or 0.2 percent, according to Commerce Department data.

The January number was the first time in two years that consumer spending decreased on a monthly basis rather than just slowing down.

Markets have also been ailing in recent weeks. The Dow Jones Industrial Average of big U.S. stocks was down more than 200 points in early trading on Tuesday and has shed more than 6.5 percent of its value over the past month.

The S&P 500 index is down more than 7.5 percent over the past month, the Russell 2000 index of smaller U.S. companies is down more than 10 percent, and the technology-heavy Nasdaq is down more than 11 percent.

The trigger for falling equity values over the past two weeks appears to have been uncertainty about tariffs. The Trump administration has announced tariffs on multiple occasions and then reversed the orders either in part or in whole, leading to retaliatory measures from top U.S. trading partners China and Canada.

China has released two tranches of tariffs on U.S. durable goods and raw materials, and the Canadian province of Ontario imposed on Monday an electricity surcharge in three U.S. states that would affect more than a million homes. The dollar impact of Canada’s electricity tariffs is moderate, according to industry experts.

Beneath the policy uncertainties, some macroeconomic warning signs have been flashing. Inflation in the consumer price index rose over the fall from a 2.4-percent annual increase in September to 3 percent in January as the Federal Reserve started cutting interest rates, which it has since paused.

The Atlanta Federal Reserve is forecasting a 2.4-percent contraction in gross domestic product (GDP) for the first quarter, and some commentators have been warning about the prospect of a recession. Despite many predictions of recession over the past two years, overall macroeconomic conditions have stayed strong, with sold GDP growth through the end of last year and low unemployment.