Small business optimism is at its highest point in six years, according to a new report of the National Federation of Independent Business (NFIB).
The post-election economic outlook has created this “optimism on Main Street,” said Bill Dunkelberg, NFIB chief economist and dean of temple universityFox Business School of.
“Small business owners feel more confident and hopeful about the new administration’s economic agenda,” Dunkelberg said. “Expectations for economic growth, lower inflation and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.”
NFIB’s monthly report fits with recent surveys conducted by Intuithe US Chamber of Commerce, Thryv, ZipRecruiterand American Express. Everyone says business owners are more optimistic about revenue and hiring growth in 2025. Many of my clients are equally optimistic about next year.
Still, important challenges remain.
Inflation is sticky
Core inflation is at 3.2%higher than the Federal Reserve’s stated goal of 2%.
Many companies are still dealing with double-digit cost increases accumulated over the past few years, and continue to do so.
According to the NFIB, 20% of business owners said last month that inflation (including higher input and labor costs) was the most important problem in operations. That’s “unchanged since November and leads job quality as the top issue by one point,” according to the NFIB report.
Meanwhile, according to Paychex Small Business Employment Monitoringaverage growth in workers’ hourly earnings has been less than 3% over the past five months. As inflation outpaces wage growth, consumer spending could take a hit in 2025.
High interest rates
While the Federal Reserve has cut interest rates twice in the past six months, the national prime rate (which banks use when lending to their most preferred customers) is at 7.5%. significantly higher than the average rates that companies paid in the past.
Unfortunately, most small businesses pay between one and three points above that rate, depending on their credit history. They could face rates of up to 10.5% on loans for equipment, property and working capital needed to grow their businesses.
A five-year equipment loan of $1 million at a 9% interest rate would generate approximately $245,000 in total interest costs. If that same business owner received a similar loan in 2021, when interest rates averaged 4.75%, the total interest paid would have been half.
Imminent tariffs
President donald trump has promised to impose tariffs on goods imported from many countries, which could increase the costs of items purchased by small businesses.
Companies can find Ways to Avoid These Higher CostsBut a significant risk to their margins remains, particularly for companies that rely on foreign-made products and cannot find better-priced alternatives.
“The repercussions of these tariffs would be felt by all companies that sell imported goods and all companies that use imported inputs to run their businesses.” warned the Brookings Institute in November. “Prices will rise, production will depress and employment will likely fall, particularly in sectors exposed to higher input prices or foreign retaliation.”
Tax break
Trump plans aggressively pursue making permanent many of the provisions of the Tax Cuts and Jobs Act of 2017. That could maintain important deductions for pass-through businesses, research and development costs and capital expenditures, as well as lower tax rates for corporations . You could also keep the current standard deduction for individuals.
But Trump will face opposition and with only a five-seat lead in the House of Representatives, he is not certain to succeed.
As a Certified Public Accountant, I advise many of my clients to remain calm and monitor developments closely. I expect a resolution by mid-year.
Unfortunately, tax planning is critical and this uncertainty can prevent companies from investing and hiring.
Regulatory uncertainty
During the Biden administration, rules on overtime, worker classifications and business ownership raised costs and privacy concerns for many small businesses. Increased fines, regulations and activity by the Occupational Safety and Health Organization, the Equal Employment Opportunity Commission and the National Labor Relations Board also posed compliance challenges.
But many of these rules are being challenged in court and the Trump administration is unlikely to defend them. Many employment experts expect state-level standards to be implemented in the coming years.
“State-level trends may drive changes in paid leave, minimum wage and AI regulation,” said Daniel Johns, a attorney at Cozen O’Connor in Philadelphia. It advises employers “to stay informed about legislative changes at both the federal and state levels.”
Immigration headaches
In an already tight labor market, many small businesses will soon face new challenges in hiring immigrant workers and increased reporting requirements.
Patrick Shen, an immigration attorney at the Fragomen Law Firm in Washington, DC, told SHRM’s HR Quarterly that employers should take steps now “to ensure proactive compliance.” Shen hopes that “extreme vetting” will return, and that “increased interview requirements and greater scrutiny of visa applications” will become commonplace.
The Trump administration is likely to be more pro-business than Biden. But that doesn’t mean that businesses, especially small ones, won’t face difficult situations in the coming years.