Why Small-Business Optimism Is Up Despite Tariff Uncertainty
Small business optimism in the United States surged in July 2025, reaching its highest level in five months. The NFIB Small Business Optimism Index climbed 1.7 points to 100.3, exceeding its 52-year historical average of 98. This rise occurred despite heightened economic uncertainty, particularly around tariffs and trade policy.
The increase in optimism was driven by two key factors: expectations of improved economic conditions and the recent permanence of the 20% small business tax deduction. Business owners expressed greater confidence in expanding their operations and hiring, signaling a positive outlook despite ongoing challenges.
The share of business owners who believe it is a good time to expand their businesses jumped five points to 16%. This optimism was further bolstered by the passage of legislation making the small business tax deduction permanent, which is expected to encourage investment and job creation.
However, challenges remain. Labor quality continues to be a significant concern, with 21% of owners citing it as their top issue. Despite plans to increase employment, finding qualified workers remains a pressing challenge for many small businesses.
Overall, the data suggests that while uncertainty persists, small business owners are more confident about the future due to improved policy certainty and economic expectations. This optimism is a promising sign for the U.S. economy, even as tariffs and labor market pressures continue to pose challenges.
Key Insights and Challenges Facing Small Businesses
While optimism has increased, the Uncertainty Index surged by 8 points to 97, reflecting ongoing concerns about external factors such as tariffs, trade policy, and labor quality. This rise in uncertainty underscores the delicate balance small businesses are striking between optimism and caution in the current economic landscape.
The NFIB Small Business Optimism Index reached 100.3 in July 2025, surpassing its 52-year historical average of 98. This improvement was driven by a combination of factors, including favorable policy changes and improved economic outlooks. However, the increase in the Uncertainty Index highlights the persistent challenges small businesses face, particularly in navigating an unpredictable economic environment.
Policy Certainty and Tax Relief
The permanence of the 20% small business tax deduction has been a cornerstone of the renewed confidence. Congressional leaders have emphasized that this policy change, combined with enhanced expensing options, is expected to stimulate robust job creation and foster a more dynamic economy. Business owners view these tax benefits as a catalyst for hiring, investing, and expanding their operations with greater financial certainty.
Expansion and Hiring Plans
The percentage of business owners planning to increase employment rose to 14%, indicating growing confidence in making future hiring decisions. However, labor quality remains a significant challenge, with 21% of owners identifying it as their top concern—the highest single issue reported. This highlights the ongoing struggle to find skilled and qualified workers in a competitive labor market.
Labor Market Pressures
While more businesses are looking to hire, the share of firms with unfilled job openings dropped slightly. This suggests that despite the desire to expand, small businesses are facing difficulties in attracting and retaining qualified employees. Labor quality issues have emerged as a critical barrier to growth, mirroring broader trends across the U.S. economy.
Compensation and Prices
There was a noticeable pullback in the share of businesses increasing employee compensation, and fewer firms are planning near-term pay hikes. Despite this, measures for raising average selling prices, both current and planned, remain above historical averages. This indicates that while wage growth may be slowing, businesses are maintaining pricing power in the market.
Sales and Inflation
Just 11% of firms cited poor sales as their main problem, tied with those identifying inflation as a top concern. This suggests that while inflation remains a headwind, it is not dominating the outlook as much as labor market concerns. Small businesses appear more focused on navigating workforce challenges than managing price pressures.
Overall Business Health
The overall assessment of business health has improved significantly. Thirteen percent of owners now rate their business health as excellent, up five points from previous reports. Additionally, 52% describe their business health as good, while only 4% rate it as poor. These metrics reflect a broadly positive sentiment among small business owners, despite the lingering uncertainties.
Conclusion
The surge in small business optimism, as reflected in the NFIB Small Business Optimism Index, highlights a resilient and forward-looking mindset among U.S. business owners. Despite ongoing uncertainties, including tariffs and labor market challenges, the permanence of the 20% small business tax deduction and improved economic expectations have bolstered confidence. Business owners are more inclined to expand, hire, and invest, signaling a positive outlook for the U.S. economy. However, challenges such as labor quality and economic uncertainty remain critical factors that could influence future trends.
FAQ
What is driving the increase in small business optimism?
The increase in optimism is primarily driven by improved economic expectations and the permanence of the 20% small business tax deduction, which has provided financial certainty for business owners.
What are the main challenges facing small businesses?
Labor quality is the top concern, with 21% of owners citing it as their main issue. Additionally, uncertainties around tariffs, trade policy, and inflation continue to pose challenges.
How are small businesses responding to labor market pressures?
While there is a desire to expand and hire, finding qualified workers remains a significant challenge. The share of firms with unfilled job openings has dropped slightly, indicating difficulties in attracting skilled employees.
What impact has the 20% small business tax deduction had?
The tax deduction has provided financial certainty and encouraged business owners to invest, hire, and expand their operations. It is viewed as a key driver of renewed confidence and economic growth.
How are small businesses handling inflation and pricing?
While inflation remains a concern, fewer businesses cited it as their main problem compared to labor market challenges. Many firms are maintaining pricing power, with measures for raising selling prices above historical averages.
What does the future look like for small businesses?
The outlook is broadly positive, with business owners expressing confidence in expanding and hiring. However, ongoing uncertainties and labor market pressures could influence future trends. Policymakers and business leaders will need to address these challenges to sustain growth.