Small businesses across America are showing signs of renewed optimism after months of cautious economic outlook. For the first time in 2025, small business sentiment has ticked upward, according to the latest National Federation of Independent Business (NFIB) survey released yesterday.
The NFIB Small Business Optimism Index rose 2.4 points in May to 92.3, breaking a five-month decline that had market analysts concerned about potential economic contraction. While this figure remains below the 49-year average of 98, the improvement signals that Main Street may be adjusting to the economic realities that have dominated 2025 thus far.
“We’re seeing cautious optimism return to the small business sector,” said William Dunkelberg, NFIB Chief Economist. “After weathering persistent inflation and labor market challenges, owners appear to be adapting their business models and finding ways to move forward.”
The survey, which polled approximately 1,500 small business owners nationwide, revealed several encouraging trends. The percentage of owners expecting better business conditions in the next six months increased 5 percentage points to a still-negative 15%. While pessimists still outnumber optimists, the gap is narrowing for the first time since December 2024.
Perhaps most encouraging was the uptick in capital expenditure plans, with 27% of owners planning to make investments in the coming months, up from 24% in April. This typically signals longer-term confidence in business prospects.
“When small business owners commit to capital investments, they’re voting with their wallets that they see growth ahead,” I noted while covering the Federal Reserve’s small business roundtable last month in Chicago. The sentiment at that gathering was notably more subdued than what these numbers now suggest.
The inflation picture, which has dominated economic concerns for nearly four years, also showed modest improvement. Twenty-six percent of owners reported inflation as their single most important problem, down from 29% in April. This represents the lowest reading since early 2022, though it remains historically elevated.
Federal Reserve data corroborates this trend, showing core inflation moderating to 2.7% annually, approaching but still above the Fed’s 2% target. The central bank has maintained its current rate stance through the first half of 2025, with markets increasingly expecting at least one rate cut before year-end.
Labor markets continue to present challenges for small firms, however. Forty-one percent of owners reported job openings they couldn’t fill, while quality of labor remained the top overall concern for 21% of respondents. This persistent tight labor market, despite modest cooling throughout 2024, continues to pressure wage growth.
“Small businesses remain caught between their need for workers and their ability to raise prices to cover higher labor costs,” explained Sarah Thompson, senior economist at Goldman Sachs. “This squeeze on margins has been the primary headwind for the sector.”
Regional differences were notable in this month’s report. Northeastern states showed the strongest improvement in sentiment, with confidence rising 4.7 points, while the Midwest lagged with just a 1.2-point increase. These regional disparities reflect varying exposures to manufacturing, agriculture, and service sectors across the country.
When viewed alongside other economic indicators, the small business sentiment uptick aligns with moderating but still-positive GDP growth projections of 2.1% for 2025, according to the latest Bloomberg economic survey. Consumer spending has remained resilient despite elevated interest rates, providing crucial support for small retailers and service providers.
The Treasury market has responded cautiously to these developments, with yields on 10-year notes easing slightly as investors recalibrate expectations around Fed policy. Wall Street analysts remain divided on whether this represents a true inflection point or merely a pause in deteriorating conditions.
Morgan Stanley’s small business analyst team notes that “while one month doesn’t make a trend, the breadth of improvement across multiple NFIB survey components suggests this could mark a genuine turning point for the small business sector.”
Having covered small business trends for nearly two decades, I’ve observed that sentiment often leads actual economic performance by three to six months. If this relationship holds, we might expect improving small business activity through the latter half of 2025.
The NFIB survey follows last week’s robust labor market report showing the U.S. economy added 185,000 jobs in May, exceeding economist expectations. Small businesses contributed approximately 45,000 of those positions, according to ADP private payroll data.
As America’s 32 million small businesses navigate the remainder of 2025, their collective confidence will likely serve as a crucial barometer for the broader economy. After all, these firms employ nearly half of all private-sector workers and generate roughly 44% of U.S. economic activity.
For now, Main Street appears to be finding its footing after a challenging start to the year. Whether this represents the beginning of a sustained recovery or merely a temporary reprieve remains the trillion-dollar question for the U.S. economy.
