24/7 Wall St.

The National Federation of Independent Business (NFIB) Tuesday morning reported that its small business optimism index for September tumbled by 2.3 percentage points from 105.3 in August to come in at 103.0. The consensus estimate from economists called for the index to increase by 0.1 percentage points to 105.4.

The sharp drop is due to falling expectations for sales in the months ahead. The expected decline comes not just from those states affected by hurricanes, but from small business owners across the country.

The four fundamental measures of the index posted mixed results last month. The job creation component rose by a point month over month in September to 19%, the job openings component fell one point to 30%, capital spending plans fell two points to 27% and inventory investment plans rose five points to 7%.

Some 25% of small business owners reported raising employees’ pay in the past three months. That’s down three points on a seasonally adjusted basis from the August total. Since January, net compensation changes have dropped by five percentage points. Some 18% of small business owners are planning to raise wages in the next three months, up three points month over month and flat compared to January.

In its comments on the report, NFIB noted:

Owner optimism posted a decline but remained historically very high, driven primarily by reduced optimism about sales, business conditions and the environment for expanding a business. However, fundamental Index components were stronger, with gains in hiring plans and inventory investment plans. Capital spending plans were weaker but down from a very high level last month, returning to levels more typical this year. With recent improvement in other economic indicators including the September ISM Non-Manufacturing Index which is at its highest since 2005, and the prospect of recovery spending, the fourth quarter doesn’t look bad at all.

The NFIB reports that 30% of business owners currently have positions open that they are unable to fill (down a percentage point from August and down one point compared to January) and that 49% said there were few or no qualified applicants for the open positions, down three points from the prior month’s total.

Business owners said their single most important problem is taxes (21%), followed by quality of labor (19%). Government regulations and red tape (16%) and poor sales (11%) were the third and fourth most-cited problems. The least important problems are financing/interest rates (1%) and inflation (2%).