Wells Fargo Economics says labor market remains in “a state of malaise” despite firmer revenue expectations
Business sentiment often shifts before hard economic data does, and January offered a reminder of that pattern. The latest Small Business Optimism survey, analyzed by Wells Fargo Economics, shows confidence pulling back slightly at the start of the year even as expectations for future sales improved. The NFIB’s Small Business Optimism index edged lower in January, ending a two-month streak of gains. While the decline was modest, it reflected softer hiring and capital spending plans, as well as a slight dip in the share of firms expecting broader economic improvement. At the same time, a rebound in sales expectations stood out as a counterweight to the otherwise cooler tone.
“In sum, dimming small business sentiment largely tracks with what we are seeing across the spectrum of recent macroeconomic data,” Wells Fargo stated in the report.
Data also indicates that real GDP continues to expand at a sturdy rate and that inflation does not appear to be reaccelerating in a meaningful way. Still, the report emphasized that small-business hiring—long a key contributor to overall employment growth—has slowed in recent months.
Hiring and Labor Conditions
The share of small firms planning to increase headcounts over the next three months has gradually eased over several months. That moderation aligns with a similar decline in hard-to-fill job openings, which have now fallen to a new cycle low. Wells Fargo’s economists were direct about the implications for the broader labor market, writing that the downshift “suggests the labor market is still stuck in a state of malaise.” Small businesses account for a significant portion of net job creation, and softer hiring intentions may translate into slower payroll growth nationally if the trend persists.
The pullback does not point to outright contraction, but it does suggest that labor demand is cooling from the more aggressive pace seen earlier in the recovery cycle. For commercial real estate sectors tied to employment growth—such as office, retail and multifamily—this incremental slowdown in hiring could influence tenant expansion decisions later in the year.
Capital Spending Trends
Capital expenditures present a mixed picture. Over the back half of 2025, the share of owners reporting increased outlays over the prior six months climbed to its highest level since November 2023. Much of that spending was directed toward new equipment. By contrast, spending on vehicles, facilities and new structures or land declined. Plans for additional investment over the next six months also ticked down in January, signaling that while businesses have recently deployed capital, they may be turning more cautious about committing to new projects in the near term.
For the commercial property market, that divergence matters. Equipment spending tends to benefit manufacturing and industrial users, but slower intentions around facilities and land investment can weigh on demand for development sites and build-to-suit projects.
Inflation and Pricing Power On the inflation front, January brought modest relief. The share of firms raising prices fell four points during the month, marking a second consecutive decline. At the same time, the share expecting to raise prices over the next three months climbed four points.
Over the past year, both measures have moved largely sideways. The report’s takeaway is that inflation remains elevated compared to pre-pandemic norms but is no longer accelerating. Businesses appear to retain some pricing power, though not to the degree seen during peak inflationary periods. This steady but warm pricing environment could continue to shape lease negotiations and operating cost assumptions across sectors such as retail and hospitality, where margins are sensitive to input costs and consumer demand.
Sales Expectations Rebound
The most encouraging element of the January survey was the jump in sales expectations. The share of firms anticipating stronger sales rose six points, reaching its highest level since early 2025. That optimism, however, contrasts with recent performance. Actual sales improved only modestly in January and remain weak compared to historical averages. The gap between expectations and recent results underscores a broader theme: business owners appear more hopeful about the months ahead than current data might justify.
The share of firms expecting the economy to improve over the next six months eased slightly in January, though it remains above the average recorded in the years following the pandemic. Wells Fargo noted that responses can carry a degree of political bias, with more upbeat readings often occurring during Republican administrations. Even so, the firm’s baseline outlook calls for solid real GDP growth in 2026.
Taken together, the January survey suggests an economy that continues to expand but at a measured pace. Hiring is no longer accelerating, capital spending is becoming more selective, and inflation pressures are stable rather than intensifying. Yet sales expectations and broader growth forecasts remain constructive. For commercial real estate stakeholders, that combination points to steady but unspectacular demand conditions. As long as GDP growth holds and inflation remains contained, small businesses may continue to expand cautiously—supporting space needs, though not at the rapid pace seen during earlier phases of the recovery.
