Every year, the Federal Reserve surveys thousands of small employer firms to understand how they are actually doing - not how economists think they are doing. The 2026 report, released in March, covers what happened in 2025 and what business owners expected going into this year.
The headline: things are tighter than they look from the outside.
The Number That Should Get Your Attention
Seventy-seven percent of small firms reported one or both of these challenges in the last 12 months: rising costs of goods, services, or wages - and increased costs from tariffs.
Not a fringe issue. Three out of four businesses.
Break it down by industry and it gets more specific:
- Retail: 69% reported tariff-related cost challenges
- Manufacturing: 62% reported tariff-related cost challenges
If you buy inventory, parts, or raw materials from overseas - or if you compete with businesses that do - this is already affecting your pricing environment.
How Businesses Are Responding
Of firms that source inputs from outside the U.S. (that is 48% of all employer firms), here is what they did when those costs went up:
- 76% passed at least some costs to customers. Translation: prices are going up at small businesses.
- 60% absorbed at least some of the increase. Meaning they took the hit on margins.
- Only 13% switched to domestic suppliers. That sounds low - it is low - because for many products, domestic alternatives either do not exist or cost significantly more.
- Only 8% switched to a different foreign supplier.
Most businesses are doing both: raising prices and eating some of the cost themselves. That is not a sustainable strategy indefinitely.
The Outlook Is at a Six-Year Low
The Fed tracks something called a revenue expectations index. Higher means more businesses expect revenues to grow in the next 12 months. Lower means fewer do.
In the latest survey: the index fell to 33. That is the lowest reading since 2020 - the year of the pandemic shutdowns.
To put that in context: this reading is now below where it sat during the height of COVID uncertainty.
The employment expectations index tells a similar story: it fell to 23, also the lowest since 2020. Fewer business owners plan to hire in the next year.
Meanwhile, cash flow comfort has dropped sharply. Only 20% of small firms describe themselves as "very comfortable" with their cash flow - an 11-point drop over just two quarters.
The Trade Exposure Problem
Here is something that does not get covered enough: small businesses are far more globally connected than most people assume.
- 48% of small employer firms sourced at least some inputs from outside the U.S. in 2024
- 14% sourced more than half of their inputs from abroad
- One in five had sales to international customers
And on those international sales: firms were more than twice as likely to expect a decrease in international customer sales than an increase (40% expect a decline versus 16% expecting growth).
That is a meaningful reversal for small exporters who have spent years building international revenue.
What This Means in Plain Terms
Think of it this way: the tariff conversation in the news tends to focus on large manufacturers and retailers. But the Fed's data shows the real weight is landing on small businesses - the ones with the thinnest margins, the least leverage with suppliers, and the fewest options for switching.
A small restaurant that buys cooking equipment imported from abroad. A clothing boutique with a supplier in Southeast Asia. A hardware store that stocks tools manufactured overseas. A dentist's office buying supplies from a distributor whose chain of custody includes foreign components.
These are not edge cases. They are the majority.
What You Can Do Right Now
1. Audit your supplier chain. Do you know which of your vendors are sourcing inputs from abroad? Call them. Ask directly: have your costs changed in the last six months, and do you expect them to change again?
2. Build a cost pass-through model. If your input costs increase by 10%, can your prices absorb that without losing customers? Run that number on paper before you have to answer it in real life.
3. Check your cash reserve math. Only 20% of small firms feel very comfortable with cash flow. If you are in that 80%, figure out your runway. The answer should be specific: not "we're okay" but "we have X months of operating expenses covered."
4. Consider domestic alternatives before you need them. Switching suppliers under pressure is expensive. Exploring alternatives now - even if you do not switch - gives you leverage in pricing conversations with existing vendors.
The Fed survey covers 2025 data. But the conditions it describes are not improving in 2026. The businesses that will hold up best are the ones that already know where they are exposed.
Source: 2026 Report on Employer Firms, Federal Reserve Small Business Credit Survey, published March 2026. Survey covers 2025 business conditions.