By Megan Leonhardt
Small businesses largely managed to weather the economic turbulence over the past year, but expectations for the year ahead have stalled.
Despite an uncertain business environment and rising prices, small-business revenues, employment, and profitability held fairly steady over the past year, according to the 2026 Report on Employer Firms released Tuesday by the Federal Reserve Bank of Cleveland.
About 6,525 firms with less than 500 employees took part in the survey, which was fielded from Sept. 3 to Nov. 14, 2025.
To be sure, stable business conditions are far from a flourishing sector. Small-business performance lags prepandemic levels, the survey found. In fact, slightly more businesses reported revenue declines than gains for the second consecutive year.
That's likely suppressing optimism for the coming year. Expectations for revenue growth and employment gains in 2026 declined to their lowest levels since the 2020 survey, the Cleveland Fed reported. Those expectations matter: small businesses comprise nearly 40% of private-sector payrolls.
That said, given the ever-evolving economic conditions, survey data has not been the most reliable metric of consumer and business activity in recent years. And results do vary based on the timing of surveys. A Bank of America Institute survey released last month found that small business owners were cautiously optimistic, expecting better business health and higher sales this year.
Some of the trade policy uncertainty could be easing. Payroll processor Gusto, which services more than 400,000 U.S. small businesses, reported that firms added 105,700 net new jobs in February. That's nearly double the average of 55,100 monthly payroll gains reported over the past year and a reversal from January's revised net loss of 8,200 jobs.
Rising costs remain the top financial concern among small business owners, according to the Cleveland Fed. Nearly half of businesses surveyed by the Fed reported sourcing at least some of their products and materials from outside the United States in 2024, and now 84% of those firms said those inputs cost more.
The BofA Institute reported that among its small business customers, tariff payments were up 142% year over year in January on a three-month moving average.
About 76% of small businesses reported already passing along at least part of those rising costs to their customers, the Cleveland Fed reported. Yet a similar number, about 60% of businesses, also reported shouldering some of that increased cost burden -- increasing the likelihood that more consumer price hikes are still in the pipeline. Only a small number of firms reported having the wherewithal to switch suppliers or relocate production.
"Some small business owners have found it difficult to raise prices and have reported being negatively impacted by all the increased demands on their clients' income," writes Taylor Bowley, lead author of the Bofa report and an economist with the Institute.
Many small businesses, however, are exploring technological solutions to ramp up their efficiency and productivity -- including using artificial intelligence. Nearly half, about 46%, of small businesses report using AI in some way, the Cleveland Fed reported. Most are using the technology to help with writing, marketing, individual productivity, and planning or analysis tasks.
Still, about a third of firms do not plan to use AI, saying it's not applicable to their business.
"Still, until cost pressures -- particularly tariffs and other inflationary inputs -- moderate more meaningfully, small business owners may remain hesitant to scale up hiring or investment despite reasonably resilient consumer demand," Bowley noted.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 03, 2026 11:00 ET (16:00 GMT)
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