The overall economy impacts small businesses, but particular impacts might be different for small companies versus large corporations. A small business economic forecast begins with current conditions—but that’s harder than it seems. Government data helps, but has limits. A respected survey adds insights, and I have questions a number of bankers on the topic. With a current picture in place, that can be combined with my overall economic forecast to develop a picture of moderate growth for small business—but with two opportunities for improvement.
Small Business Data
Proprietors’ incomes before taxes grew 2.6% in the 12 months through November 2025 (the most recent data), about in line with inflation. This government data excludes S corporations and limited liability corporations with multiple members, but it’s what we have. The pattern was weird in the spring but bounced back to normal. Although the overall economy grows faster than inflation most of the time, small business has not been so fortunate.
Pre-tax net income for unincorporated businesses.
Dr. Bill Conerly using data from the U.S. Bureau of Economic Analysis
Proprietors’ incomes have trended down relative to gross domestic product (GDP) in recent years. GDP before inflation adjustment is likely to grow by somewhere between 4.5% and 5.0% in 2026. Proprietors’ incomes will exhibit less growth, probably around 4.5% or a little less.
Small Business Optimism
The Small Business Optimism survey conducted by the National Federation of Independent Business captures both current conditions and expectations for the future—which are heavily influenced by the present. Optimism surged in November 2024, probably on the election of President Trump. Then optimism dropped about the time of the early tariff announcements. The past six months have turned rosier.
Small business optimism still high
Dr. Bill Conerly using data from the National Federation of Independent Business
Uncertainty is fairly high among small business owners. The survey asks ten questions, with an option to answer “don’t know” or “uncertain.” These responses are combined into a measure of uncertainty. It peaked in October 2024, just before the election. It dropped recently from its peak, but is still at a high level. So uncertainty remains elevated, though not as bad as it had been.
Most telling for the difficulties of this sector, the survey asks about earnings in the last three months compared to the prior three months. After seasonal adjustment, every month for the past six years has more “lower” responses than “higher.”
In short, the small business sector is not doing worse than normal, but normal isn’t very good.
An Informal Small Business Survey
After my January 2026 economic forecast was published on Forbes, I received a message from a banker friend whose experience was at odds with my sense of the current economy. This could indicate a trend just developing, or perhaps this one company had a niche that performed differently than the overall economic situation. Economic data are published with a time lag from actual activity, so I stay alert to “on the ground” experience from people in business.
I reached out to a number of contacts, mostly in the banking sector but also including one real estate executive. I sent this request:
“I just heard from a banker contact that his small business customers are not doing very well. This conflicts with my view of the economy, so I’m trying to learn more. Do you see a weakening in earnings among your customers? Anything else happening on ground level that you can share?”
Out of nine responses, most people did not see a pronounced weakening in the last six months or so, though two of my contacts did. That plus my original contact suggest that some portions of the small business sector are trending down now.
Despite the general view that conditions have not worsened, most people noted ongoing difficult conditions for many small businesses. The greatest problems seem to be costs rising faster than businesses can raise prices. This is worse for the smaller businesses. Many companies feel uncertainty in general, and especially with respect to tariffs.
Economic Forecast For Small Business
My conclusion is that the economy is not worsening overall, but some industries are having more trouble. And challenges pervade small business now, as they have for some time.
My forecast is that small business earnings will grow moderately but not as fast as the overall economy. Net income before taxes will probably grow by about four percent, on average, but with wide variation within the small business community.
Small Business Opportunities
But well-run small businesses have two significant opportunities.
Pricing relative to costs is one problem area for small businesses. In past years, some of my private equity contacts have opined that small businesses are often too cautious about raising prices. The owners worry that customers will leave them if their prices are too low. When I’ve watched closely, it seems that customers with a good relationship understand prices rising to keep up with costs. And that would apply not only to the cost of products being resold or used in production, but general expenses as well: insurance, staff salaries, property taxes, etc. I cannot prove this, but I believe that many small businesses have pricing power that they are not using. They could test price increases cautiously, but end up with decent margins if all goes well.
The second opportunity for small businesses is speed and flexibility. Many industries have consolidated. For example, the number of banks in the United States fell by over 50% since 2000. Most small banks have operating costs per dollar of revenue in excess of their mammoth competitors. Yet many community banks do quite well. Every large corporation has a region or product-specific division that is performing poorly. Sometimes corporate policy constrains local or product managers from serving their customers well. Other times the corporation is not offering the right goods or services for a particular niche. Yet other times an inept divisional manager causes poor results for customers.
Small business is just a error prone as big business, but with a huge distinction: good small businesses can correct their mistakes quickly. The large corporations are often slow to recognize problems, and then respond slowly. Small business has the potential—the potential—to learn quickly and adjust quickly. Those that keep their management agile, adapting promptly to changes in conditions, will often find a large competitor from whom they can take business.
Small business is tough, but not only can it survive, it can thrive.
