Small business optimism fell in May as taxes and labor costs squeezed owners across the country. The NFIB Small Business Optimism Index dropped 0.6 points to 95.3 in May, according to a report published by the National Association of Manufacturers on June 15, 2026. The index remains below its 52-year average of 98, continuing a stretch of below-average confidence among America's small business owners.
The May decline was driven by weakening labor components, though improvements in earnings trends and inventory plans provided some offset. Of the 10 components tracked in the index, three increased, six decreased, and one remained unchanged. Taxes emerged as the top concern for small business owners, with 19% reporting it as the most important problem—up 2 points from April. Labor costs ranked third in the list of concerns at 14%, up 5 points and the highest reading in the survey's history. The share of businesses citing inflation as the most important problem rose 2 points from April to become the highest reading since December 2024, with a net 36% of owners raising prices. Meanwhile, the Uncertainty Index increased 3 points to 91, well above the 51-year average of 68 and above the average since 2016 of 80.
Labor market pressures showed mixed signals in May. The share of businesses reporting labor quality as the most important problem fell 5 points from April, yet 29% reported they were struggling to fill jobs and 55% were hiring or trying to hire. A net 31% of small business owners reported raising compensation, up 1 point in May after dropping 3 points in April, while 18% of business owners plan to increase compensation in the next three months, unchanged from April. Pressure on profitability weakened in May, with positive profit trends rising 4 points from April to a net negative 15%. Among owners reporting lower profits, 32% blamed weaker sales, 16% cited rising material costs, 14% mentioned usual seasonal changes, 9% noted labor costs, and 7% mentioned price changes on their products or services. On the credit front, 4% of owners reported that their last loan was harder to get than previous attempts, up 1 point from April, and a net 6% of owners cited paying a higher interest rate on their most recent loan, up 4 points from the prior month.
The report reveals a business environment where small owners face mounting cost pressures from multiple directions at once. The historic high for labor cost concerns signals that wage increases—while necessary to attract scarce workers—are squeezing thin profit margins at the same time that taxes and inflation eat away at revenue. The simultaneous rise in all three top concerns creates a perfect storm: owners must pay more for workers and materials while facing higher tax burdens, yet 32% of those with lower profits cite weak sales as the primary culprit. This squeeze explains why the outlook for general business conditions declined 1 point to 3%, the lowest level since October 2024, and why expectations for better business conditions are down 22 points from May 2025.
Small business owners remain deeply pessimistic about what's ahead. Expected business conditions fell for the fifth consecutive month, reaching the lowest level since October 2024. Just 7% reported that it's a good time to expand their business, unchanged from April and a weak reading compared to times of economic expansion. The report notes that overall, small business owners remain relatively pessimistic about the outlook as cost pressures show no signs of easing and uncertainty continues to run well above historical norms.