Small businesses optimistic despite facing uncertainty, tariffs, technology changes

Small businesses contribute over 40 percent of the nation’s GDP and employ nearly half the national workforce according to a report by the U.S. Chamber of Commerce. As such, it is important for the Federal Reserve to understand current conditions and challenges small businesses face. In support of this, the Federal Reserve gathers and analyzes data from across the district to inform policymakers to support small businesses and foster their success.

Our recent article explored SBCS responses from 2024 which showed small businesses in Texas held positive outlooks despite facing decreased revenue, high costs, and difficulty accessing financing. Since then, there have been broad changes to economic policies and technology. In order to unpack these themes and gather additional insights from small business owners on how they are facing these changes, we conducted a series of focus groups across Texas.

In these focus groups, we asked about current business conditions and challenges, labor, possible impacts of tariff policy, artificial intelligence (AI) applications, and outlooks on business.[1]  While small businesses continue to face structural issues such as lack of financing and competition against larger firms, current conditions are not only exacerbating these issues but presenting new and unique challenges to business owners.

Businesses report slowdown over summer months into fall

When asked about current conditions, many contacts shared that business had slowed in August and September of 2025. Several attributed this to more conscious consumer spending partly as a reaction to higher prices. Others shared general economic uncertainty, competition from big firms and seasonal spending patterns among customers as reasons behind declining business. Notably, the few who reported increased demand for their products or services were established businesses with local name recognition.

One Houston restaurant owner said:  “The food business in general right now—peers—aren't doing well, a lot of restaurants are closing. [But] we're actually doing really well. We've always been community-oriented, and that seems to be the reason for our success.”

Tariffs impact cost of doing business, generate uncertainty

The discussion about business conditions naturally led many firms to speak about changing trade policy, namely tariffs. While participants from retail, service and technology firms reported experiencing negative impacts from tariffs, manufacturers indicated experiencing the most direct impacts. Firms shared that tariffs have increased the cost of doing business, and they responded with some stockpiling or changing their suppliers.

Although tariffs were the main reason for many cost increases, insurance and health care costs are also reportedly higher. Apart from price changes, participants noted that tariffs introduced an increased level of uncertainty, with quick and unpredictable changes to trade policy leaving many small businesses wondering how to proceed operationally or facing unknown costs from suppliers.

“The uncertainty is the most significant effect [from tariffs]. People don’t want to make decisions with uncertainty,” a San Antonio wholesale trade business owner said.

Despite a slowdown in business and high levels of uncertainty reported among participants, almost all participants in the August and September conversations shared positive outlooks for the remainder of 2025.While a few gained confidence from strong client relationships or the quality of their products, most expected higher sales in the near term as a result of increased spending during the holiday season.

Small businesses unable to rely on commercial banks for funding

When asked about any current or future expansion plans, only a few firms were making investments. One restaurant was opening a second location while others were investing in equipment, doing software upgrades or diversifying products or services. Many small businesses spoke broadly about hopes to expand in the future and pointed to access to funding as the main obstacle to expansion. Participants largely did not consider commercial banks to be a viable option. Instead, they said grants, rolling loans, micro-loans and lines of credit were more realistic options.

Generational culture shift cited for difficulty finding quality labor

Several businesses said they are currently hiring, mostly to fill turnover or jobs left by retiring employees. Many participants expressed difficulty in finding quality labor due, in part, to a shift in workforce culture and wage competition for skilled positions. Employers described the new generation of workers as unwilling to do additional tasks, lacking interest in the business and unreliable.[2] Some participants said they have kept their day jobs or done work outside their traditional tasks to keep their businesses going.

A Brownsville retailer said: “It is difficult to find quality labor. I know that there are a lot of moving factors. I hate to say it, but sometimes they [high school and university students] really don't want to work. I get multiple direct messages a month asking if we are looking to hire. I ask candidates to email me a resume and only one person has ever sent me a resume. I don't know if people just don't have time or what it is.”

Small businesses deploy AI to cut costs, save time, but claim human intelligence irreplaceable

The conversation about labor dovetailed into several responses from business owners regarding the use of AI. Many noted that AI cannot replace human intelligence but can supplement their current labor. Small businesses reported using artificial intelligence for tasks such as emailing, marketing, design, assistant work, market research, coding and operational work. While many said using AI has made some of their work more efficient or quicker, several shared concerns about using AI, including the potential for increased white-collar unemployment, greater competition, trustworthiness and loss of human interaction.

“They're using AI in classes for motor shops [to read and describe code to send to customers in an easy-to-understand way]. It gives you options for speaking style. It's a game changer,” a Houston auto service firm participant said.

How long can small businesses face big challenges?

Small businesses have long faced structural issues such as lack of financing and regulatory hurdles that put them at a disadvantage against larger companies. These structural issues were mentioned during the focus groups, but new factors including tariffs and artificial intelligence create an unusual environment for small businesses to navigate.

Tariffs have increased costs and generated uncertainty as trade policy shifts daily, leaving business owners in difficult positions regarding planning and creating more conservative consumer behavior. Additionally, participants said they commonly use AI to perform marketing and assistant tasks saving them time and money, but they see possible downsides to the technology.

Overall, small businesses do not have the same resources as larger firms to weather current challenges and incorporate new technology. While owners are still reporting positive outlooks for business, the continued impacts of higher costs and lower demand on top of persistent structural issues may turn the tide for these firms. Continued conversations with small businesses are an important way for us to understand the direction of the economy and to share information to inform policies that support the success of small businesses.

Notes

1. We hosted a total of three focus groups: one in Houston, one in San Antonio and one in Brownsville. Read more about focus group methodology in the appendix.
2. To learn more about what young adults have to say about work, read "Salary not sole concern for young adults weighing career decisions, focus groups find."