A recent analysis by the Bank of America Institute indicates a significant slowdown in the vitality of small businesses across the United States, marked by a deceleration in hiring activity and emerging pressures on profitability. This economic shift, a notable reversal from earlier in the year, is closely tied to a significant surge in tariff payments by importing firms, alongside broader economic uncertainties and evolving labor market dynamics. The findings underscore the unique vulnerabilities small enterprises face within a complex economic landscape shaped by trade policy and consumer behavior.
According to proprietary small business data from Bank of America, payments to hiring firms declined for the third consecutive month through July. This trend is underscored by a 6.7% year-over-year decrease in hiring activity, measured on a three-month moving average, indicating a sustained cooling in the small business job market. This deceleration contrasts with the robust hiring trends observed at the start of the year, suggesting a responsive reaction to changing economic conditions.
A primary driver of this financial strain for small businesses is the escalating cost of tariffs. Bank of America Institute economist Taylor Bowley noted that small business clients making direct payments to customs have seen these expenses surge by nearly 170% since the beginning of the year, a direct consequence of higher tariffs implemented by the Trump administration. Unlike larger corporations, small businesses often operate with thinner profit margins and have less flexibility to adjust their supply chains or absorb these elevated costs, placing disproportionate pressure on their financial health.
The impact of these pressures is not uniform across all sectors. While hiring payments in construction and manufacturing have begun to ramp up, other sectors such as retail and services have experienced declines. This sectoral divergence points to a targeted impact of tariffs and evolving consumer spending patterns. Concurrently, although small business profitability growth has remained positive, it has started to decelerate, further reflecting the cumulative effect of rising costs and potentially weaker demand. A recent survey by the National Federation of Independent Businesses (NFIB) highlighted that the share of small business owners identifying poor sales as their top concern reached its highest level since February 2021, underscoring challenges in revenue generation.
Adding another layer of complexity to the small business environment are ongoing labor market dynamics. Despite a general deceleration in overall wage growth, some sectors, including construction, restaurants, and lodging, have seen an increase in payroll payment growth since the start of the year, indicating persistent labor shortages in specific industries. This suggests a nuanced labor market where a restricted supply of workers continues to affect certain segments, even as broader wage pressures may be easing.
Ultimately, the confluence of increased tariff burdens, decelerating profitability, and a bifurcated labor market presents significant strategic challenges for small businesses. Their inherent inability to easily shift supply chains or absorb substantial cost increases, unlike larger, publicly traded companies, leaves them particularly exposed to macroeconomic shifts and trade policy adjustments. As these enterprises navigate an environment of elevated operating costs and cautious consumer spending, their capacity for expansion and job creation faces considerable headwinds.
Sophia Patel brings deep expertise in portfolio management and risk assessment. With a Master’s in Finance, she writes practical guides and in-depth analyses to help investors build and protect their wealth.