Investing Insights

SMALL BUSINESS SENTIMENT  •  August 15, 2026  •  Jon Wolfenbarger

Labor Shortages, War And AI Drive Small Business Sentiment

TAVIRA, PORTUGAL — Since small businesses provide almost 50% of US jobs, the monthly NFIB small business survey provides a treasure trove of information about current and expected trends in the US economy. 

Let’s take a look at the last NFIB survey to see what is really going on in the economy.

Small Business Optimism Rebounds Above Average 

In July, the NFIB Small Business Optimism Index jumped 2.4 points to 99.8, its highest level since August 2025. That is above the 52-year average of 98, as shown below. Eight of the 10 components of the Optimism Index increased, led by a big jump in hiring plans and improving capital outlay plans, while expectations for higher real sales and satisfaction with current inventory levels both slipped.

Unfortunately, the Uncertainty Index rose 2 points to 91, still well above the historical average of 68. The increase was driven by more owners reporting uncertainty over whether now is a good time to expand their business and their capital expenditure plans.

Sales Remain Soft & Earnings Are Still Disappointing 

A net negative 4% of small businesses had higher sales over the past three months, unchanged from June and still below the historical average of zero. The sales outlook also weakened, with the net percentage expecting higher real sales over the coming three months falling 2 points to just 7%. Since small business sales are highly correlated with nominal GDP growth, this remains a weak signal for the economic outlook.

Despite the weak sales results, the percentage of small business owners reporting positive profit trends rose 4 points to a net negative 16%. That is an improvement, but as this chart shows, it remains well below pre-covid levels.

The Employment Index rose 1.9 points to 102.1, its first increase after four straight months of decline, and modestly above the 2025 average of 101.2 and long-term average of 100. A net 20% of owners plan to hire workers in the next three months, up 9 points from June, 9 points above the historical average, and the highest reading since October 2022.

A net 54% had capital outlays in the last six months, up 3 points from June. A net 25% expect to spend on capital expenditures over the next six months, up 5 points from June and the highest level since December 2024, driven by the AI boom.

A net 31% reported raising selling prices, down 7 points from June but still well above the historical average of 14%. Going forward, a net 28% plan to increase prices over the next three months, down 4 points. The share of owners citing inflation as their single most important problem fell 7 points to 14% — the first decline this year — suggesting some easing in price pressures, at least for now.

Labor Shortages And A War-Driven Oil Shock Are Now The Biggest Headaches 

NFIB's chief economist, William Dunkelberg, framed the disconnect between Wall Street and Main Street this way:

"Main Street has become a bit more optimistic about future economic developments. The NFIB Small Business Optimism Index improved significantly, managing to exceed the 52-year average. The gain was driven by a substantial improvement in hiring plans, accompanied by an improvement in plans to make capital expenditures. Capital investments have been driving economic growth, primarily AI investments in chips and structures to house them in. Although this is not primarily a small-firm activity, it looks like spillover business opportunities are reaching them.

The stock market has been rewarding shareholders very well, and this is supporting a lot of spending by the wealthier consumers who hold equity. Restaurants, car dealers, home improvement companies, etc., all benefit from the wealth being created in the stock markets. Enjoy it while it lasts. The unemployment rate is staying low, and the inflation rate is bothersome, driven primarily by oil prices. A favorable resolution of the war with Iran will significantly reduce oil prices when it finally happens. The world has plenty of oil.

There was a significant decline in the full suite of inflation metrics, led by the percentage of owners raising their average selling prices. This is an especially good sign since it occurred while consumer spending stayed solid and compensation was still rising. The Fed has turned its attention to managing the inflation rate, which is well above the 2% target. Interest rates respond to expected inflation using current experience as a guide. The Fed has indicated that it will pay close attention to developments. Uncertainty remains high, most likely due to the status of the war with Iran. A meaningful resolution will be a major plus for the economy and small business owners."

For the first time in a while, labor — not inflation or taxes — is small business owners' single biggest complaint. A record-tying 27% cited "labor quality or availability" as their most important problem, up 8 points from June and 15 points above the historical average, ahead of taxes (16%) and inflation (14%). War-driven oil prices, insurance costs, and tariffs also remain sore points. Here are some key quotes from small business owners:

• "The ability to find/hire competent workers in the HVAC field is increasingly more difficult year to year. It is absolutely necessary to help promote and fund the mechanical trades, particularly the HVAC trade!" – Construction, CT
• "This is the worst period for hiring skilled labor. I have positions open today that pay well with benefits, but there aren't any qualified candidates. I have used Indeed, ZipRecruiter, social media, banners, website, etc." – Retail, PA
• "We are highly seasonal as a farm and do not have steady income...We have a severe labor shortage, which many of us have turned to the federal H-2A program to meet our needs. Labor is now greater than 50% of our input costs due to the rise in benefits, overtime, paid sick days, and base wage rates." – Agriculture, NY
• "The inflation caused by tariffs has significantly affected our business. Your customer accounts are struggling to pay their invoices, which amounts to approximately 20-30% of our gross profit." – Retail, TN
• "In farming we are experiencing very high input costs coupled with low commodity prices which have impacted our margins...Our commodities are mainly priced by the Chicago Board of Trade, and I have no way of passing on these increased expenses, leaving myself and the larger agriculture community with the very real possibility of negative margins on our 2026 crops." – Agriculture, PA
• "The cost of interest, insurance, power (gas/electric), supplies, and vehicle gas is drowning my business. Small businesses need help!" – Services, MI
• "Inflation is an issue – not sure how much inventory to order. Taxes force business to make out-of-ordinary decisions...Economy appears strong on Wall Street but weak on Main Street." – Retail, IL
• "The Big Beautiful Bill really helped stabilize my cash flow and net income." – Services, MT
• "I own a laundromat and will be purchasing four new washers soon...Cost of equipment is fairly reasonable (but still high), but the taxes are ridiculous! Taxes on the equipment, plus shipping, plus installation, plus other taxes." – Services, TN
• "Our business is down 15.5% year to date from last year and 28% down from our 5-year average. Rising costs of materials and freight have made us go up in our pricing...Our expenses have skyrocketed, and insurance and health insurance are now unaffordable." – Retail, TX
• "Our insurance costs have been a burden for several years. Increasing at a rate we can barely keep up with – most notably auto. And windstorms are also a concern." – Manufacturing, TX

Investment Implications 

Unlike in prior months, the AI capex boom finally appears to be delivering some spillover benefit to Main Street: small business capital spending plans just hit their highest level since December 2024, and hiring plans surged to a nearly four-year high. Inflation pressures also eased for the first time this year. But the improvement is fragile. Sales growth remains soft, a record share of owners can't find qualified workers, and the unresolved war with Iran continues to keep oil prices — and business uncertainty — elevated. If peace finally breaks out, that would meaningfully ease inflation and lift small business sentiment further. Until then, we will be watching oil prices and the war's trajectory as key swing factors for both Main Street costs and the inflation outlook that the Fed is focused on to determine their next move on interest rates.