Small Businesses, Which Employee More Than 60 Million U.S. Workers, Are Losing Confidence

Small businesses in the United States are facing a perfect storm of high inflation, rising costs, labor shortages and reduced consumer demand, all of which are creating significant challenges for this segment of the economy. As a result, the optimism of small business owners has plunged to its lowest level since December 2012, according to recent data by the National Federation of Independent Business, a nonpartisan, nonprofit organization that advocates for small and independent businesses in the U.S.

The Small Business Optimism Index plummeted to 88.5, dropping 0.09 of a point, in March, marking the 27th consecutive month the index fell short of the 50-year average of 98.

Small businesses—independent businesses with fewer than 500 employees—are a crucial component of the U.S. economy, as they account for substantial job creation and contribute significantly to the nation’s gross domestic product.

Why Small Businesses Are Critical To The U.S. Economy

There are 33.3 million small businesses in the U.S., which employ about 61.6 million workers, according to data by the Small Business Administration Office of Advocacy. Small businesses comprise nearly half (45.9%) of the American labor force and account for 43.5% of the country’s GDP.

In the past 25 years, small businesses have created more than 12.9 million jobs, representing around two-thirds of all new jobs added to the U.S. economy during this period.

What Headwinds Do Small Businesses Face?

“Small business optimism has reached the lowest level since 2012 as owners continue to manage numerous economic headwinds,” said Bill Dunkelberg, chief economist at NFIB, in a statement. “Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly.

Inflation remains stubbornly high at 3.5%, which will likely lead to a more hawkish monetary policy stance by the Federal Reserve Bank, and keep interest rates higher for longer than previously anticipated by the market.

For small business owners, high inflation can lead to increased costs for materials, rent, wages and other expenses. These factors can strain cash flow and make it difficult to invest in growth.

NFIB’s monthly jobs report indicates a slowdown in hiring activity for small businesses in March, with employers attributing to lower labor quality. Workforce shortages, due to a lack of qualified candidates, limit a small business’ ability to meet customer demand.

Weakening consumer spending is also impacting small businesses, as retail sales have fallen more than expected, Axios reported. This, combined with the cost pressures, is squeezing small business profit margins.