The Federal Reserve just dropped its 2026 Report on Employer Firms, based on responses from thousands of small business owners across the country. It is one of the most rigorous annual snapshots of how small businesses are actually doing - and this year, the headline is simple: costs went up, expectations went down, and almost nobody changed suppliers.

Here is what the data says, translated into plain language.

The Big Number: 77%

Seventy-seven percent of small businesses reported dealing with rising costs in the past 12 months - either from tariffs, higher wages, or both. That is not a fringe problem. That is nearly every business.

Of the firms dealing with higher costs from foreign suppliers specifically:

• 76% passed at least some of those costs on to customers. In plain terms: prices went up for your customers.
• 60% absorbed some of the increase themselves. They ate the difference out of their margins.
• Only 13% switched to domestic suppliers and only 8% found different foreign suppliers.

The practical reading: most small businesses chose the path of least resistance - either raise prices or tighten margins. Very few went through the harder work of rebuilding their supply chain.

Revenue Growth Stalled

The survey found that revenue and employment growth "held steady" - which sounds fine until you look at the trend. Growth expectations have now fallen to their lowest levels since the 2020 pandemic survey. The revenue expectations index dropped six points in one year, from 39 to 33.

What does 33 mean? It is a net score. More businesses expect revenue to fall than rise. That is not a catastrophe, but it is a yellow flag.

The most common operational challenge: reaching customers and growing sales. Not staffing, not regulations - just finding people who will buy.

Who Got Hit Hardest by Tariffs

The Fed broke tariff-related cost challenges down by industry:

• Retail: 69% reported tariff-related cost increases
• Manufacturing: 62%

If you run a shop that sells physical goods or makes things, you already know this. But it is useful to see it confirmed in hard numbers: this is not an outlier problem.

Debt and Credit: The Hidden Bright Spot

Here is something the headlines missed. The share of small businesses with no outstanding debt has grown from 21% in 2020 to 31% today - back to pre-pandemic levels.

That matters because it means more businesses have financial breathing room. If you are running lean and debt-free right now, you are in better shape than you might feel. The businesses with the most pressure are the ones who borrowed during the stimulus era and are now servicing that debt in a high-cost environment.

Of firms that do carry debt, 59% used a personal guarantee to secure it - meaning the owner's personal assets are on the line. That is worth understanding before you take on more.

The AI Finding Nobody Is Talking About

The Fed also tracked AI adoption for the first time in depth. Among small businesses that use AI tools:

• 71% reported increased productivity
• 39% saw improved quality of goods and services
• 31% saw higher sales

The two biggest challenges with AI: accuracy concerns and difficulty adapting the tools to their specific workflows.

So What does this mean for you? AI adoption is real and measurable - the payoff is in productivity first, revenue second. If you have not started using AI in your operations yet, you are behind 58% of your peers (the survey found that 58% of small businesses now use generative AI in some form).

What to Do With This

Three moves worth considering based on where the data points:

If your costs are up and you haven't raised prices yet: 76% of your competitors already have. You are not being noble - you are compressing your margins while your costs stay high.

If you're still on the fence about AI: The productivity number is not coming from big companies with IT teams. It is coming from small business owners. Start with one process - quotes, scheduling, emails - and measure it.

If you're expecting growth: The expectations index is at its lowest since 2020. That is not a reason to stop building, but it is a reason to prioritize cash and margin over volume right now.

Source: Federal Reserve 2026 Report on Employer Firms - based on the 2025 Small Business Credit Survey