On October 3, the National Federation of Independent Business (NFIB) released its latest Small Business Optimism Index, which fell to 89.4, marking its lowest reading since mid-2023.
Credit conditions tightened as regional banks further restricted small-business lending.
Input and labor costs remain elevated despite easing inflation elsewhere in the economy.
Consumer demand softened across discretionary categories, particularly in retail and hospitality.
Market reaction: regional bank stocks fell slightly, while small-cap indices underperformed the S&P 500.
NFIB Small Business Optimism Index: 89.4 (vs. 91.3 prior) — down for the third straight month.
Average small business loan rate: 10.1% — highest since 2006.
Loan delinquency rate: 1.9% — up 40 bps year-over-year.
Wage costs: +4.3% YoY — holding steady despite slower sales growth.
Consumer spending on discretionary goods: -0.6% MoM (September) — signaling demand fatigue.
Why It Matters
Small businesses account for nearly half of private-sector employment and two-thirds of new job creation. When credit tightens here, it’s an early signal that growth momentum is fading beneath headline GDP figures.
Investor relevance: Slower small-business activity can pressure labor markets and consumer spending — both key inputs to Fed policy.
Second-order effects: Potential drag on regional bank earnings and small-cap equities; quality and large-cap growth could outperform.
Risk flags: A sustained pullback in lending could translate into weaker hiring and a sharper slowdown in Q4 consumption.
Takeaway
Base case: The U.S. economy remains resilient, but the foundation — Main Street — is softening under high financing costs and fading demand.
Positioning:
Favor quality, large-cap exposure over smaller cyclicals tied to domestic credit.
Maintain neutral duration and monitor for credit-spread widening in regional banks.
Watchlist (dates):
Oct 10: Producer Price Index (input costs) — confirms if inflation pressure persists.
Oct 15: NFIB credit-conditions survey update — key gauge for Main Street stress.
Actionable lens:
Hold quality equities and defensive sectors for now; consider adding exposure to small-caps only after lending standards begin to ease.
— Lauren Brown
Editor, American Ledger