The backbone of the US economy flashes stagflation warnings as uncertainty spikes on tariffs and layoffs — ‘storm clouds are forming’

OSTN Staff

  • A recent survey of small businesses raised numerous red flags about the economy, including trends that point toward potential stagflation pressure. That’s as President Donald Trump keeps companies guessing on what he will do next on federal layoffs and tariffs, raising uncertainty about prices, costs, and expansion plans.

Small businesses are the backbone of the American economy as they employ the vast majority of workers, and they are flashing warnings on stagflationary pressure.

On Tuesday, the NFIB Small Business Optimism Index fell by 2.1 points in February to 100.7 while the reading on uncertainty rose 4 points to 104, the second highest level recorded.

Other findings raised red flags: fewer business owners expect the economy to improve, sales expectations were gloomier, and profit trends worsened.

Additional data points could raise alarms about stagflation, a combination of slower growth or contraction plus higher inflation.

The survey found that just 12% of owners think now is a good time to expand, a 5-point decline from January and the largest monthly decrease since April 2020—when the economy was still reeling from the early stages of the COVID-19 pandemic.

And the share of business owners who are raising average selling prices jumped 10 points from January. That’s the largest monthly increase since April 2021, when the post-pandemic inflation surge was taking off, and the third highest in the survey’s history.

“Confidence that the economy will continue to grow is fading, even with a new management team in place,” the NFIB report said, alluding to the Trump administration.

It cited US tariffs and retaliation from affected countries as well as the federal government shedding workers and trimming expenditures.

NFIB added that many small businesses are supported by work from other firms with government contracts.

“All consistent with the general tone of the financial press, the economy is still growing, but at a slower and slower rate, storm clouds are forming,” it warned.

The mounting pessimism among small-business owners is also echoed by consumers—whose spending is the driving force behind GDP and previously kept the economy resilient through Fed rate hikes.

The latest University of Michigan sentiment survey tumbled 11% from the prior month due to inflation fears. Year-ahead inflation expectations jumped up from 4.3% last month to 4.9% this month, the highest since November 2022 and the third straight month of an unusual large increase. Long-run inflation expectations surged from 3.5% to 3.9%, the largest month-over-month increase since 1993.

Torsten Sløk, chief economist at Apollo Global Management, said in a note on Thursday that this is a “wait-and-see economy” characterized by consumers and firms turning more cautious about spending decisions.

“The wait-and-see economy is no longer just for companies directly involved in trade with Canada and Mexico. Uncertainty for small businesses is near all-time high levels. This is a problem because small businesses are the foundation of the economy, accounting for more than 80% of total US employment,” he warned.

This story was originally featured on Fortune.com