Sales and earnings gains offer a counterweight, but labor market softness and sticky inflation cloud the outlook for small firms nationwide
Small business optimism declined for a second consecutive month in February as firms pulled back on capital expenditure plans and signaled weaker hiring intentions, according to a March 10 report from Wells Fargo Economics. The retreat was driven primarily by a reversal in capital spending. After a 4-point gain in January, the net share of firms making capital outlays dropped 6 points in February. Future capex plans held steady at 18 percent, a level Wells Fargo characterized as historically weak.
Still, the sideways movement in planned spending suggested that appetite for business investment, while subdued, has at least stabilized. Hiring plans deteriorated alongside the capex pullback. A net 12 percent of small firms indicated they intended to hire over the next 3 months, down from 16 percent in January and the lowest reading since May 2024. Job openings edged up slightly to 33 percent but remained historically soft. The weakness appeared to stem from tepid demand for workers rather than a shortage of qualified candidates. The share of firms citing labor quality as their top problem slipped to 15 percent in February, “marking the lowest share since April 2020,” according to the report.
Despite the headline decline, sales figures offered a more encouraging signal. The net share of firms reporting higher sales over the prior three months turned positive for the first time since May 2022. Sales expectations dipped but stayed solidly in positive territory, bringing the two measures back into closer alignment, the report noted.
Earnings also strengthened. The net percent of firms reporting improved post-tax income surged seven points to negative 14 percent. While still in negative territory on a net basis, the indicator reached its highest level since December 2021, according to Wells Fargo Economics.
The divergence between labor market softness and improving revenue metrics underscored a broader theme in the data.
“Strong earnings and sales appeared to be the primary drivers, illuminating the growing gap between labor market performance and overall economic health,” the report stated.
On the inflation front, pricing pressures showed little movement. A net 24 percent of small firms raised prices in February, while 28 percent planned to do so, both figures remaining elevated above historical norms. Each measure declined slightly from January, but the report noted that these inflation indicators have essentially moved sideways over the past year, suggesting that small business pricing behavior has settled into a persistent pattern that has yet to meaningfully cool.
Economic outlooks held relatively steady, dipping only marginally from the prior month while remaining well above recent historical averages. A net 15 percent of owners described current conditions as favorable for business expansion, while 18 percent expected favorable conditions over the next six months. Both readings exceeded the average trend since the pandemic, according to the report. The tone of the report acknowledged tension between anecdotal sentiment and the data. Industry comments highlighted rising costs across physical inputs, labor and healthcare, painting a less optimistic picture than the survey metrics themselves. Yet Wells Fargo’s economists noted that small business outlooks “align with our own expectations for economic expansion over the next year.”
The February data presents a mixed picture for the broader economy. Revenue growth and elevated expansion expectations suggest that underlying demand remains intact, even as firms grow more cautious about committing capital and adding headcount. For commercial real estate, the implications are nuanced: steady economic expansion supports occupier demand, but the reluctance to invest in capex and the persistent weakness in hiring plans could weigh on absorption in certain asset classes, particularly office and industrial space tied to small and mid-sized tenants. With inflation stuck in a holding pattern and the labor market continuing to soften at the margins, small business operators appear to be navigating a period of selective optimism, confident in their top-line performance but guarded about commitments that would expand their fixed cost base.
