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'The Uncertainty Index': Why small businesses in America are losing optimism

The Small Business Optimism Index has maintained a solid reading in recent years, but it took a tumble in September, falling 1.3 points to 101.8.

NFIB Chief Economist Bill Dunkelberg told Yahoo Finance’s The Ticker that small business is solid when it comes to things like hiring, capital spending, and investing in inventories, but uncertainty revolving Fed actions, tariffs, and the overall political climate are to blame for the fall.

“It’s pretty clear that we’re a little uncertain about where the future is going to go,” Dunkelberg stated. “We have an Uncertainty Index that has gone up six points over the last couple of months and it’s at pretty high levels, so it says they can’t give you certain firm answers about whether they think things are going to get better or worse, they’re just uncertain about the direction, and that’s causing a little bit of a consternation about what to do going forward.”

“The Fed is certainly contributing to that uncertainty,” Dunkelberg continued. “About 40% of our members say that they’re affected by what’s going on with trade...We often find that the second most frequently cited reason for it being a bad time to expand is the political climate. The first problem of course is a weak sales, or a weak economy, but the political climate has now become a major concern for people when they think about expanding their business.”

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And when it comes to tariffs, the NFIB reported that tariffs are adversely affecting many small firms, with 30% citing negative effects in NFIB’s September survey.

“With respect to trade policy, it’s going to be the impact of tariffs on the cost of inputs that they have,” Dunkelberg stated. “They of course have a lot of retailers who import stuff and sell it here and they have to worry about that.”

What’s working for small business

In terms of what’s solid when it comes to small business, the NFIB is reporting that rising labor compensation remained historically strong in the September survey, with fewer firms reporting raising selling prices.

“We were happy to see 140,000 jobs, and we’ve certainly contributed as much as we could to that,” Dunkelberg said. “Hiring plans are of course very strong, and that’s a good sign that the small business owners are still pretty optimistic about the future because they’re perfectly willing to hire. And hiring is not an easy thing, it’s an expensive investment, and they’re willing to make it. So they’re going to try. And the way they can try to solve that problem of course, is to raise compensation. We see record high percentages of our owners saying ‘we’re raising worker comp’ and they plan to raise worker comp going forward.”

Chelsea Lombardo is a production assistant for Yahoo Finance. You can find more of her work here.

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