The National Federation of Independent Business’s (NFIB) Small Business Optimism Index fell 0.9 points to 88.5 in March, marking the lowest level of small-business optimism in the U.S. since December 2012. March was also the 27th consecutive month when the NFIB’s Small Business Optimism Index came in below its 50-year average of 98.

“Owners continue to manage numerous economic headwinds,” NFIB chief economist Bill Dunkelberg said, noting that “inflation has once again been reported as the top business problem on Main Street.”

For Ed Yardeni, the veteran Wall Street economist and investment strategist who now runs Yardeni Research, “it was a pessimistic report overall,” leading him to ask (rhetorically) in a Tuesday note: “Will depressed small business owners depress the economy?”

The answer? Their pessimism is a cause for concern, but not yet a harbinger of a recession.

Small businesses employed 61.6 million Americans in 2023, and they typically generate roughly 45% of U.S. economic activity, according to the Small Business Administration. That makes their health critical to the overall state of the U.S. economy, even if large publicly traded companies tend to get more attention. 

Still, despite the recent dive in small business owners’ optimism, Yardeni, who has maintained a non-consensus optimistic outlook for the economy and markets in recent years, implied in his Tuesday note that the details of the NFIB’s Small Business Optimism Index reveal we’re in a painful period, but not a recessionary slowdown just yet.

The pessimistic backbone of the American economy

Yardeni’s view is based on the fact that small business owners are mostly concerned about issues that illustrate the economy is running hot, not cooling rapidly. For example, a quarter of all small business owners said inflation was the single most important problem they faced, as seen in high labor and input costs. That was up two percentage points from February, but still well below the all-time survey high of 41%. 

Small businesses’ inflation issues mirror the acceleration in the increase of the consumer price index this year, from a 3.1% annual rate in January to 3.5% in March. But inflation typically doesn’t rise during economic slowdowns—in fact, it’s often a sign that the economy is growing quickly, with companies being forced to raise prices. The NFIB’s survey shows that could be what’s happening today. In response to higher costs, a net 28% of small businesses said they were raising prices in March, and 43% reported higher average selling prices.

Finding talent was small business owners’ second major concern in the NFIB survey, with a net 37% saying they had job openings they couldn’t fill. Again, that’s a sign that the labor market remains tight, not that a wave of recession-induced layoffs is on the way.

Plus, just 8% of small business owners said that “poor sales” were their number-one concern, compared to the all-time survey high of 34%. And just 4% of small businesses marked interest rates as their top concern, compared to a survey high of 37%. This illustrates that consumer demand is still strong in the economy, and rate hikes aren’t weighing on small businesses too heavily for now.

“We would be more concerned about the recessionary implications of the latest NFIB survey if more small business owners were complaining about poor sales and interest rates,” Yardeni wrote of the data. 

Still, looking forward, the net percentage of small business owners who expect higher sales volumes fell eight percentage points month over month in March, to a net negative 18%. “The small business sector is showing signs of a potential slowdown in economic activity with net sales expectations falling,” NFIB researchers said of their report.

The recent pessimistic survey from the NFIB also follows their monthly jobs report from last week, which showed small-business hiring plans were the weakest since May 2020. And with inflation still weighing on small businesses, 55% of owners reported lower profit margins in 2023, according to a December Goldman Sachs survey of over 14,000 small businesses.

Combined, these issues are evidence of the painful period small-business owners are navigating, and why they’ve become so pessimistic. But for Yardeni, “the solid performance of the economy has been at odds with the mounting pessimism of small business owners since early 2022.”  

Yardeni still believes the U.S. will avoid a recession in 2024, and he even sees a “Roaring 2020s” economy, in which inflation fades and new technologies like AI help boost the economy and markets, as the most likely outcome moving forward. With total household net worth hitting a record $156.2 trillion in late 2023, and baby boomers holding a record $76.2 trillion of that wealth, Yardeni argues, there is plenty of money out there to support the economy and markets for years to come. 

“This helps to explain the resilience of the economy and why there hasn’t been a consumer-led recession over the past two years, as was widely feared,” he wrote in a Monday note, adding: “The Baby Boomers watched a lot of Star Trek during the 1960s. They certainly took to heart Spock’s mantra ‘Live long and prosper.’ He should have finished the thought with ‘Then retire and spend it all before your expiration date.’”