By Megan Leonhardt

Momentum from the pandemic recovery has stalled for the majority of small-business owners, which could pose challenges for the wider U.S. economy.

America's small businesses employ nearly half the nation and contribute more than 43% of the country's economic growth.

Yet more small businesses are reporting revenue declines, flat employment growth, higher debt levels, and dimming optimism, according to the Federal Reserve's latest small business credit survey released Thursday.

In 2024, more small businesses reported their revenues decreased (41%), than those that saw an increase (38%). That's the first time that has occurred since 2021.

Profitability was a bit better, with 46% of small businesses reporting they operated at a profit in 2024. But 19% of firms reported breaking even and 35% operated at a loss last year. For the second year in a row, the survey's revenue performance index declined, falling by seven points in 2024 following a three-point decline in the previous data release.

The annual survey had over 7,600 responses from U.S. businesses with fewer than 500 workers.

The latest data from the Fed isn't an outlier. Small-business owner concern for revenue increased by 10 percentage points to 35% during the first quarter, according to the MetLife and U.S. Chamber of Commerce Small Business Index released Wednesday. And Intuit found that growth in average monthly real revenues for small businesses with up to nine employees was down 0.5% in February compared with a year ago.

Much of the stalled momentum comes down to ever-changing operating costs. The Fed survey found the most commonly cited financial challenge was the rising costs of goods, services, and labor. And shifting federal policies around tariffs and immigration could make it more challenging for small businesses to budget and plan for future outlays.

"Small businesses, because of the uncertainty, are starting to feel the squeeze," says Tom Sullivan, the chamber's vice president of small business policy. Owners are not "poised for growth," which Sullivan says is concerning considering small businesses are a primary job and innovation generators within the U.S. economy.

That is translating into depressed sentiment and, in some cases, capital expenditure planning, Sullivan said.

"If small businesses are concerned about revenues, which they are, that means they're not going to put money into their expansion plans," he said.

The latest data from the National Federation of Independent Businesses found that small business sentiment fell by 2.1 points to 100.7 in February -- the second month in a row confidence declined. The number of owners expecting better business conditions in the next six months also slumped.

In addition to uncertainty around operating costs caused by tariff and immigration policy changes, Sullivan pointed out that many small-business owners anticipated the incoming administration would extend the 2017 Tax Cuts and Jobs Act. If not extended, small businesses could see their tax rate jump to 43%.

The antidote to small business uncertainty right now is making some of the 2017 tax provisions permanent, Sullivan says. That would allow small-business owners to feel confident about hiring new workers or seeking financing for necessary business investments without worrying about getting in over their heads.

More than half of business owners, 58%, did report they had capital outlays in the last six months, a level that was unchanged from January. But future plans did slip slightly, with 19% planning capital outlays in the next six months, down 1 percentage point from January.

Yet for all the gloomy outlook, the number of new businesses remains relatively strong, with business formation applications up 7.8% in February compared with January 2025. Moreover, the level of monthly new applications remains 33% higher than prepandemic levels.

That shows Americans still see more reward than risk to starting a small business, Sullivan says. "If we see those applications over a 2 to 3 month period drop to prepandemic levels, then we're in trouble."

Write to Megan Leonhardt at megan.leonhardt@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 27, 2025 09:30 ET (13:30 GMT)

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