What Is Small Business Optimism?

The NFIB’s Small Business Optimism Index measures how small businesses feel about current and future business conditions. The Index provides essential insights into small business’ health and challenges. Investors can consider the Index a sneak peek into how nearly half of the nation’s private workforce is faring. 

Behind small business optimism: The NFIB 

The National Federation of Independent Business (NFIB) describes itself as a nonprofit, nonpartisan, member-driven organization. First founded in 1943, the NFIB dedicates itself to advocating for rights and legislation that benefit small businesses. 

In its own words, the NFIB promotes and protects the “rights of its members to own, operate, and grow their businesses.” 

Through its operations, the NFIB advocates for small and independent business owners in all 50 state capitals and Washington, D.C. As of 2017, the NFIB claimed over 325,000 members. 

The small business optimism index

Every month, the NFIB collects data from its hundreds of thousands of small businesses via optional surveys. The organization’s findings are released on the second Tuesday of each month via the Small Business Optimism Index.  

The Small Business Optimism Index is a numerical composite of the general attitude of small businesses. The Index includes 10 seasonally-adjusted components based on questions involving:

• Plans to increase or decrease employment
• Capital outlays
• Current inventories and future inventory plans
• Economic expectations for the near future
• Expectations regarding sales growth and credit conditions
• Whether now is an optimal time to expand operations
• Earnings trends
• Current job openings

The baseline Index sets its value at 100. Numbers over 100 indicate that small business optimism is generally positive, while numbers below 100 indicate economic turbulence or recession fears. When any of the Index’s components shift, the value of the overall Index moves to reflect the change. 

What the small business optimism index tells investors

Economies are complex organisms not just because of their sheer size, but the fact that their performance often hinges – at least partly – on psychology. 

When people and businesses feel more confident, they’re more likely to spend money and keep the economy thrumming. But if they’re fearful about the future, they’re likely to spend and hire less, gumming up the economic gears. 

Measuring small business optimism allows experts to analyze how a substantial portion of the workforce feels about the economy. Consider that in 2022, small businesses employed nearly 62 million people – 46.4% of the total workforce. 

The Small Business Optimism Index also provides essential insights into the problems that small businesses face or expect to face. It also examines whether small businesses expect to expand or contract hiring as well as future pricing plans.  

In other words, the Index attempts to measure the overall health and expectations of small U.S. businesses. 

How does small business optimism affect you?

Gauging small business optimism is important because they’re more likely to succumb to economic downswings. When a substantial portion of small businesses shut down, the impacts ripple into the rest of the economy. Reports of shifting small business health can also move the stock market – particularly shares issued by small-cap firms. 

Keeping an eye on small business optimism allows investors to anticipate and respond to these changes ahead of time. Additionally, watching optimism indexes allows you to prepare for potential impacts to larger businesses down the line.