Small business optimism strengthened further in December, with the National Federation of Independent Business (NFIB) reporting that its closely watched Optimism Index rose 0.5 points to 99.5—the highest reading since April 2025 and comfortably above the survey's long-term average of 98.

Improved Business Outlook Drives Gains

The increase was primarily driven by a significant improvement in expectations for business conditions. A net 24% of owners reported expecting better business conditions over the next six months, up 9 percentage points from November and marking the first increase in that measure since July.

Meanwhile, the NFIB's Uncertainty Index fell 7 points to 84, its lowest reading since June 2024. The decline in uncertainty suggests that business owners feel more confident about the policy and economic environment heading into 2026, though substantial concerns remain.

"2025 ended with a further increase in small business optimism. While Main Street business owners remain concerned about taxes, they anticipate favorable economic conditions in 2026 due to waning cost pressures, easing labor challenges, and an increase in capital investments."

— NFIB Chief Economist Bill Dunkelberg

Breaking Down the Numbers

Of the 10 components that make up the Optimism Index, two increased, three declined, and five were unchanged from November. Beyond the improvement in business condition expectations, several other indicators painted a mixed but generally positive picture:

  • Job Openings: A seasonally adjusted 33% of owners reported job openings they could not fill, unchanged from November but well above the historical average of 24%.
  • Hiring Difficulty: Of the 53% of owners who were hiring or trying to hire, 91% reported few or no qualified applicants for the positions they were trying to fill.
  • Interest Rates: A net negative 3% of owners reported paying a higher interest rate on their most recent loan, down 5 points from November and the lowest reading since January 2021.
  • Capital Expenditures: 59% of owners reported making capital outlays in December, consistent with recent months.

Taxes Emerge as Top Concern

For the first time since May 2021, taxes were cited as the single most important problem facing small businesses. Twenty percent of owners identified taxes as their top concern, up 6 points from November.

The surge in tax concerns likely reflects uncertainty about potential policy changes in 2026, including discussions about corporate tax rates and the possible expiration of certain business provisions from the 2017 Tax Cuts and Jobs Act.

Inflation, which had dominated the list of concerns for the past three years, fell to second place at 17%. While still elevated, the reading represents meaningful progress from the peak levels seen in 2022 and early 2023.

Labor Market Shows Resilience

The survey confirmed that labor market conditions remain tight for small businesses, though there are signs of gradual easing. Compensation plans have moderated, with a net 21% of owners planning to raise compensation in the next three months—still elevated but below the peaks seen in 2022.

Actual compensation increases remained common, with a net 31% of owners reporting higher compensation over the past three months. For businesses competing for workers, wage pressures remain a persistent challenge even as overall inflation has cooled.

Price Pressures Stabilize

The net percentage of owners raising average selling prices held steady at 27% in December, consistent with the gradual moderation seen throughout 2025. At its peak in early 2022, this measure reached 72%—highlighting the dramatic improvement in pricing dynamics over the past three years.

Looking ahead, 24% of owners plan to raise prices over the next three months, down slightly from November. The combination of moderating cost pressures and competition for customers appears to be limiting businesses' ability to continue passing through increases.

What It Means for the Economy

Small businesses employ approximately half of the private workforce in the United States, making the NFIB survey an important indicator of economic health beyond what corporate earnings and stock prices reveal.

The improved optimism suggests that Main Street businesses enter 2026 with cautious confidence. While significant challenges remain—particularly around hiring and taxes—owners appear to believe the worst of the post-pandemic adjustment period is behind them.

Implications for Investors

For equity investors, the strong small business sentiment reading provides support for expectations of continued economic growth in early 2026. Small business hiring and investment decisions flow through to broader economic activity, and confident business owners are more likely to expand.

The survey also provides a useful counterpoint to consumer confidence measures, which have remained relatively depressed despite strong spending data. Small business owners, who observe economic conditions from a different vantage point than survey respondents, are signaling that underlying fundamentals remain solid.

As the Federal Reserve weighs its next policy moves, the combination of resilient small business optimism and a gradually normalizing labor market supports the case for patience on further rate cuts. The NFIB data suggests that current monetary policy settings are not unduly restricting economic activity, even as they work to bring inflation back toward the Fed's 2% target.