Small Business Optimism Falls and Beige Book Signals Economic Stagnation Amid Inflation and Labor Pressures

Weekly Economic Review: Oct. 20, 2025

This week’s economic data highlights include: (1) the NFIB Small Business Optimism Index for September and 2) the Fed’s Beige Book for October.

Key Summary:

Small business optimism declined for the first time in three months, as heightened economic uncertainty, weaker sales expectations, persistent inflation, and labor market challenges signal growing caution among owners—pointing to restrained hiring, muted capital spending, and continued pricing pressures heading into Q4.

The National Federation of Independent Business (NFIB) Small Business Optimism Index fell by 2 points to 98.8 in September, marking its first decline in three months. This drop reflects growing concerns over a weaker economic outlook and excess inventory.  Uncertainty surged to 100, the fourth-highest level in over five decades. Five of the index’s ten components declined, including expectations for economic improvement and real sales, signaling fading confidence despite perceptions of overall business health remaining steady.

Survey participants perceive that labor markets remain tight, with job openings still high and hiring plans at their strongest level since early in the year. However, labor quality continues to be the top challenge, while rising labor costs add pressure. Capital spending is steady, focused on equipment and vehicles, but future investment plans remain weak. Sales trends are soft, inventory levels are considered too high, and mild supply chain disruptions persist. Meanwhile, wages continue to rise, though expectations for future increases have eased, and profit trends improved to their best level in nearly four years despite headwinds from weaker sales and higher material costs.

Credit conditions further tightened, with more owners facing difficulty obtaining loans and paying higher rates, while borrowing costs continue to rise. Inflation remains a major concern as price pressures persist, with more owners raising prices and planning future hikes. Overall, optimism is fading – fewer owners expect better conditions soon or view this as a good time to expand. Labor quality and taxes top the list of challenges, followed by growing concerns over labor costs and inflation, while regulations, poor sales, and financing remain secondary issues.

The Fed’s October Beige Book reflects an economy holding steady overall, despite cooling consumer spending, muted labor demand, and persistent price pressures driven by tariff-related costs and uneven sector performance.  This leaves the Fed in a difficult position as it weighs another rate cut amid sticky inflation and a softening labor market.

The Federal Reserve’s October Beige Book indicated that overall economic activity was largely unchanged. Consumer spending declined, especially in retail, while auto sales rose on strong EV demand ahead of an expiring tax credit. International travel weakened, though domestic travel held steady and luxury travel remained strong among higher-income households. Manufacturing faced headwinds from tariffs and weak demand, while agriculture, energy, and transportation contracted. Financial services and real estate were mixed – business lending improved with lower rates, but overall activity remained muted. Outlooks varied, with some anticipating demand growth in 6–12 months, though uncertainty persists, including risks from a prolonged government shutdown.

Labor markets were mostly stable but showed muted demand, with employers reducing headcount through layoffs and attrition amid economic uncertainty and increased investment in AI technologies. Hiring employers reported better labor availability, favoring temporary or part-time roles, while the labor supply remained strained in hospitality, agriculture, construction, and manufacturing due to immigration policy changes. Wages in the twelve Fed districts grew modestly to moderately, but labor cost pressures intensified from sharp increases in employer-sponsored health insurance expenses. Prices continued to rise, driven by higher import costs, tariffs, and service expenses, though some firms absorbed costs to maintain market share. Others, particularly in manufacturing and retail, passed such costs on to customers, while waning demand pushed prices down for certain materials like steel and lumber in select Districts.

Let’s take a closer look at this week’s data releases, including the September Small Business Optimism Index and the October Beige Book.

NFIB Small Business Optimism Index – September Update: 

The NFIB reported that its Small Business Optimism Index declined by 2 points to 98.8 in September, marking the first drop in three months. The decrease was driven primarily by a weaker economic outlook and heightened concerns about excess inventory. At the same time, the level of uncertainty rose by 7 points from August to 100 – the fourth-highest reading in more than 51 years – reflecting increased uncertainty about expansion plans. The survey indicated that five of the index’s ten components fell, while three remained unchanged (see the Index Component section for details). Although most business owners consider their businesses healthy, they continue to face challenges from rising inflation, slower sales expectations, and persistent labor market pressures.

Labor Markets

• Job openings remain high but have eased slightly.
• Many owners struggle to find qualified candidates; hiring plans are at their highest level since early in the year.
• Labor quality remains the top concern, while labor costs are increasingly problematic.

Capital Spending

• Spending is steady, focused on equipment and vehicles.
• Plans for future capital outlays remain weak, signaling caution despite hopes for supportive tax and monetary policies.

Sales and Inventories

• Sales are soft, with more declines than gains reported.
• Expectations for future sales weakened; inventory levels are viewed as too high.
• Supply chain disruptions persist but are mostly mild.

Compensation and Earnings

• Wages continue to rise, though expectations of future increases have eased.
• Profit trends improved to their best level in nearly four years, but weaker sales and rising material costs remain challenges.

Credit Markets

• Credit conditions tightened; more owners report difficulty obtaining loans and paying higher rates.
• Borrowing costs continue to rise, though regular borrowing activity increased slightly.

Inflation

• Price pressures remain elevated.
• More owners raised prices in September, and plans for future hikes increased, signaling persistent inflation concerns.

Outlook

• Overall business health is steady, but optimism is fading.
• Fewer owners expect better conditions soon or see this as a good time to expand.

Single Most Important Problem

• Labor quality and taxes top the list (each cited by 18%).
• Labor costs and inflation concerns are growing, while regulations, poor sales, insurance costs, and financing remain secondary challenges.

Index Component

The ten components used to calculate the Small Business Optimism Index, and their September results (with changes from August) are as follows:

The Fed’s Beige Book – October Update:

The Federal Reserve released its October 2025 Beige Book, a compilation of interviews and surveys from businesses, economists, market experts, and other sources across the Fed’s 12 regional banks, detailing changes in economic conditions. This qualitative report, which is published eight times a year (typically before scheduled FOMC meetings), highlights dynamics and emerging trends in the economy that are not readily apparent in available economic data. Fed Chair Powell has previously emphasized the importance of this report in shaping his understanding of economic directions.

Overall Economic Activity

Economic activity was largely unchanged: three Districts reported slight growth, five showed no change, and four noted slight softening.

• Consumer Spending: Declined overall, particularly in retail, while auto sales rose on strong EV demand ahead of an expiring tax credit. International travel demand fell, domestic demand held steady, and luxury travel remained strong among higher-income households. Lower- and middle-income consumers continued to seek discounts amid rising prices.
• Sector Performance: Manufacturing faced headwinds from tariffs and weak demand; agriculture, energy, and transportation declined. Financial services and real estate were mixed—business lending improved with lower rates, but overall activity remained muted.
• Outlook: Some expect demand growth in 6–12 months, but uncertainty persists. One District flagged risks from a prolonged government shutdown.

Labor Markets

Employment levels were mostly stable, but labor demand was muted across sectors.

• Many employers reduced headcount through layoffs and attrition, citing weaker demand, economic uncertainty, and increased investment in AI technologies.
• Hiring employers reported better labor availability, favoring temporary or part-time roles over full-time positions.
• Labor supply in hospitality, agriculture, construction, and manufacturing was strained in several Districts due to recent immigration policy changes.
• Wages grew modestly to moderately across all Districts, while labor cost pressures intensified from sharp increases in employer-sponsored health insurance expenses.

Prices

Prices continued to rise during the reporting period.

• Cost Drivers: Input costs accelerated due to higher import expenses and increased costs for services such as insurance, health care, and technology. Tariff-related cost increases were widespread, though pass-through to final prices varied.
• Some firms absorbed costs to maintain market share, while others – particularly in manufacturing and retail – fully passed them on to customers.
• Exceptions: Waning demand pushed prices down for certain materials, including steel in the Sixth District and lumber in the Twelfth District.

US Economic Data Releases Delayed by Government Shutdown:

The following U.S. economic data releases have been delayed due to the federal government shutdown that began on October 1:

Market Analysis:

Equity Market Weekly Recap

Equity markets were volatile but ended the week higher across major indexes, with gains led by the real estate, communication, and technology sectors. Midweek, markets fluctuated sharply due to credit concerns surrounding regional banks and heightened U.S.–China trade tensions. Toward the end of the week, markets rebounded as positive earnings from regional banks, large banks, and Taiwan Semiconductor Manufacturing provided some relief. By Friday, trade-war fears eased following comments from President Trump signaling a softer stance, noting that steep tariffs on China were “unsustainable.” Markets are expected to remain volatile amid upcoming earnings – particularly from financials – as well as ongoing trade policy developments with China and the Federal Reserve’s rate decisions.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +2.14% (weekly) & +17.45% (YTD), closing at 22,678
• S&P 500: +1.70% (weekly) & +13.30% (YTD), ending at 6,664
• Dow Jones Industrial Average: +1.56% (weekly) & +8.57% (YTD), closing at 46,190
• Russell 2000: +2.40% (weekly) & +9.95% (YTD), ending at 2,452

Treasury Market Update

Treasury yields declined across all maturities over the past week, driven primarily by a flight to safety into government bonds amid concerns about economic weakness, regional bank credit issues, and U.S.–China trade tensions. On Thursday, Treasuries posted their largest gains, pushing the 10-year yield below 4% and the 2-year yield to a 15-month low.

By week’s end, the 2-year, 5-year, and 10-year Treasury yields fell by 6, 6, and 3 basis points, respectively, closing at 3.46%, 3.59%, and 4.02%.

Rate Cut Expectations

Markets are fully pricing in two 25-basis-point rate cuts in October and December 2025. Looking ahead to 2026, expectations point to three additional cuts totaling 75 basis points – anticipated in March, June, and October – as part of the Federal Reserve’s ongoing monetary easing cycle.

Next Week’s Economic Calendar:

The economic calendar for next week is relatively light, with the key highlight being the CPI report on Friday. Scheduled reports include:

• Monday:
  • September Leading Index*
• Wednesday:
  • Weekly Mortgage Applications
• Thursday:
  • Weekly Jobless Claims*
  • Existing Home Sales
• Friday:
  • CPI
  • S&P Global US Manufacturing PMI
  • S&P Global US Services PMI
  • S&P global US Composite PMI
  • New Home Sales*
  • Building Permits*

* Reports may be delayed due to the government shutdown.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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