While headlines often center on the performance of large-cap tech companies, it’s the health of small and mid-sized businesses that often provides one of the clearest windows into the strength of the U.S. economy. These businesses generate just under two-thirds of net private-sector job gains and account for around 40 percent of gross domestic product.
On Sept. 25, UCLA Anderson Forecast and Columbia Business School convened a panel of economists from PNC, the NFIB Research Center, and RSM to take stock of the policy and economic volatility shaping the outlook for small and mid-sized enterprises (SMEs), particularly in the light of the U.S. Federal Reserve’s Sept. 17 decision to cut the federal funds target rate by a quarter-point.
The discussion was hosted by Clement Bohr, senior economist at UCLA Anderson Forecast, and moderated by Columbia Business School Professor of Professional Practice Brett House.
The panel delivered a nuanced picture: optimism among business owners remains high, but hard data on jobs, sales, and investment paints a more cautious picture. Here are five important takeaways from the discussion, and what they mean for business leaders in the middle market.
1. The Jobs Market Is Losing Momentum
PNC Senior Economist Jay Hawkins emphasized the sharp slowdown in job creation as the key development of 2025. Monthly job growth has fallen from more than 230,000 earlier this year to fewer than 30,000 by summer, with June data turning negative after revisions. Historically, negative job growth has coincided closely with the onset of recessions.
Unemployment has risen from 3.4 percent to 4.3 percent and could reach 4.7 percent by mid-2026, Hawkins said. While the jobless rate is still low by historical standards, the shift is significant. For business owners, this easing labor market means two things: wage pressure is softening, but demand growth is likely to slow as households feel less secure.
PNC expects the Federal Reserve to cut rates modestly in late 2025 and early 2026, but those cuts will primarily affect the very short end of the curve. Most SMEs borrow for medium-term periods, where yields remain elevated.
2. Tariffs Are Acting as a Hidden Tax
Tariffs remain one of the most pressing headwinds for business. According to PNC, roughly 60 percent of tariff costs have been absorbed by U.S. businesses, 25 percent by consumers, and only 15 percent by foreign exporters. The effective tariff rate has quadrupled from around 2.5 percent before the current trade policy cycle to about 10 percent now, and it may climb toward 15 percent if measures expand further.
RSM economist Tuan Nguyen explained that most firms raise prices within one to three months of new tariffs, although some wait longer when demand is soft. The effect is to embed tariffs into the inflation outlook. Nguyen said tariffs and structural shifts could keep inflation around 2.5–3 percent in the coming years, while Hawkins noted PNC’s forecast has core PCE, the Federal Reserve’s preferred inflation gauge, rising to roughly 3.3 percent in early 2026 due to tariffs. For business leaders, this means input costs are unlikely to ease meaningfully in the near term.
3. Optimism Is Strong, but Owners Remain Cautious
One of the most striking findings came from PNC’s semiannual survey of small and mid-sized businesses. Owner optimism for both the U.S. economy and their own companies hit record highs this fall. Yet expectations for sales, profits, and hiring all declined compared with the spring. Only 13 percent of the companies surveyed expect to add full-time staff over the next six months, the lowest share since 2023.
NFIB Executive Director Holly Wade noted a similar pattern in her group’s Small Business Optimism Index. Overall optimism sits just above its 52-year average, but many owners remain cautious. Construction and manufacturing firms continue to report unfilled job openings, while retailers and service providers are seeing softer conditions.
This paradox — confidence paired with restraint — underscores the uncertainty of the moment. Business owners say they are resilient, but many are holding back on investment and hiring until policy and demand signals are clearer.
4. Inventory and Liquidity Management Are Key
Inventory strategy has become a dividing line between companies that can weather volatility and those that cannot. Many companies with the means to do so front-loaded imports in late 2024 and early 2025 to get ahead of tariffs. That buildup slowed in the third quarter, but RSM noted that 44 percent of companies expect to increase inventories in the next six months.
A growing number of businesses are also shifting to domestic suppliers, even when they are not directly affected by tariffs, in anticipation of further policy shocks. This makes costs more predictable but not necessarily lower.
Meanwhile, cash cushions are thinning. Nearly a quarter of PNC’s survey respondents expect lower cash reserves next year, up from 17 percent a year ago. Higher interest rates and tighter credit conditions are weighing on working capital. Business leaders should treat liquidity as a strategic priority, negotiating longer payables where feasible, and securing lines of credit before they are needed.
5. Policy Uncertainty Is a Top Risk
All the panelists agreed: uncertainty, not just interest rates, is the defining challenge for SMEs. NFIB’s survey tracks persistently substantial “uncertain” responses on questions about sales, hiring, and expansion, while PNC found that trade policy is the largest single driver of unease in its survey.
Frequent tariff pauses and resets complicate planning, forcing businesses to guess at costs and pricing. Even if the Fed delivers further rate cuts, long-term borrowing costs may remain sticky as investors demand higher premiums for uncertainty and inflation risk.
For business leaders, the message is clear: Plan investments cautiously, test for higher borrowing costs, diversify financing, and stay ready for sudden shifts in policy.
Watch the full webinar here:
FAQs:
Q: What economic signals should small and mid-sized businesses watch in 2025?
A: In this article, Experts from PNC, NFIB, and RSM highlight five key signals: slowing job growth, rising tariffs, cautious business optimism, liquidity pressures, and policy uncertainty.
Q: How are tariffs affecting small and mid-sized businesses?
A: Tariffs act as a hidden tax, raising costs for businesses and consumers. Economists warn they are embedding inflation and increasing long-term financial pressures on SMEs.
Q: Why is policy uncertainty the biggest risk for SMEs right now?
A: Shifting trade and monetary policies create unpredictable costs, making it harder for business leaders to plan investments, manage financing, and forecast growth.
