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Despite a modest bump in optimism, small business owners face significant headwinds from rising costs, uncertainty, and volatile demand.
May 2025 brought a rare uptick in sentiment. The NFIB Small Business Optimism Index rose to 98.8, up three points from April and slightly above its long-term average of 98. This marks the first increase in five months after a steep March drop, the biggest one-month decline since June 2022.
Still, the index sits at its 46th percentile since 1986, reflecting a tense outlook on future earnings for many owners. Business health ratings show 14% excellent, 55% good, 28% fair and 4% poor. Owners’ comments highlight frustration over high overhead and uneven customer flows.
Dialing deeper, surveys reveal that these sentiment swings mirror persistent challenges: unpredictable policy shifts, tight credit conditions and fluctuating consumer demand. Many fear that the slim gains may reverse if cost pressures continue unmitigated.
Inflation remains a dominant concern. Nearly 60% of owners cite rising prices as their chief challenge, the highest share since this metric emerged. Over half of respondents paid more than 4% extra for supplies and services in the past year, and 13% saw cost hikes exceed 10%.
Cost increases vary widely across industries: manufacturers face soaring energy bills, restaurants battle food price surges, and retailers are squeezed by elevated shipping fees. Some have switched suppliers or adjusted product lines to curb expenses.
In response to these headwinds, 52% plan to raise their own prices within three months; among them, 79% will increase prices by over 4%, and 19% by more than 10%. Yet many acknowledge that repeated price hikes are not sustainable indefinitely.
Trade policy is weighing heavily on margins. Two-thirds of businesses report negative tariff impacts, split between direct effects on material costs and indirect harm via reduced demand. Owners describe persistent cost pressures from abroad that complicate long-term planning.
Small manufacturers note that the unpredictable nature of tariffs disrupts supply agreements, while service businesses feel the pinch when clients tighten budgets. Taxes have also surged as a top worry: 18% of owners now rank taxes as their biggest problem, a shift unseen since December 2020.
Labor shortages compound the strain, with 34% unable to fill open positions and 86% of hiring businesses citing few qualified applicants. Owners report ramped-up recruiting efforts and higher wage offers just to maintain staffing levels.
Profitability remains elusive. Since the start of 2025, 38% of firms have experienced shrinking margins, and 31% expect further erosion. Revenue concerns hit a new high, with 35% of owners citing sales declines as their top worry in the Chamber/MetLife index.
Owners have pursued cost cuts—renegotiating leases, pausing marketing campaigns and delaying nonessential upgrades—but these measures often deliver only marginal relief. Even a small uptick in input prices can turn a break-even operation into a loss.
As firms balance price increases against demand fallout, many view productivity gains as the only reliable path. Implementing lean processes and automation can offset labor and material cost increases over the long term.
Faced with these pressures, small business leaders are innovating across multiple fronts. Raising prices remains common, but digital transformation and cost optimization are rising in priority.
Many leverage peer networks and local chambers to share best practices and pool resources. Community cooperatives and group purchasing agreements are gaining traction to drive down input expenses.
Widespread adoption of targeted marketing and online sales channels also helps smooth revenue streams when foot traffic fluctuates.
Although optimism has edged up, analysts caution that sentiment remains precarious. “Confidence is being shaken as small businesses increasingly worry about revenue while confronting tariff-driven cost spikes,” says Tom Sullivan of the U.S. Chamber.
NFIB Chief Economist Bill Dunkelberg warns the economy may stall until uncertainties around trade policy, taxes and labor are resolved. Research suggests that clearer guidance on interest rates and targeted relief for training programs could help ease hiring woes.
Some experts urge tailored subsidies or tax credits to offset tariff impacts, arguing that without decisive policy support, many small firms will delay expansion or capital spending indefinitely.
Small businesses are navigating a challenging economic environment defined by rising costs and wavering demand. Recent data hint at slight improvements, but sustained recovery hinges on easing cost pressures and stabilizing policy signals.
Owners can bolster resilience by combining strategic price adjustments with investments in operational efficiency, digital tools and workforce development. Peer support networks and local chamber initiatives also offer vital guidance and collective bargaining power.
The tenacity and innovation of small business owners, paired with targeted policy relief, will shape the path forward. While the journey is fraught with uncertainty, many remain determined to endure and thrive through collaboration and creative adaptation.
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