“The most common challenge” faced by these smaller firms in 2025 was the rising cost of goods, services and wages, the 12 regional Fed banks collectively said as part of the 2025 Small Business Credit Survey.

More than four-in-10 firms in the poll said “that increased costs associated with tariffs were a financial challenge,” with retail and manufacturing firms feeling that pressure most acutely. Among ⁠firms facing higher costs related to the president’s tax increases, 76% of respondents passed on some of the higher costs and 60% absorbed some of the expense.

“Nearly half of firms said they source at least some inputs from outside the United States, and a large majority of those firms reported that foreign inputs increased in price from 2024 to 2025,” the report said.

Firms did not on balance respond to the higher costs by changing suppliers or moving activity back inside U.S. borders.

Trump’s tariff system was a notable driver of inflation in 2025, with Fed officials attributing much of the overshoot of their 2% target last year to the tax hikes. Most Fed officials expect the impact of the tariffs to fade ⁠this year.

The Trump administration has repeatedly argued that tariffs are borne by foreigners, and are designed to both bring industry back to American shores while creating revenues for the government. The tariffs also have been repeatedly used as a coercive foreign policy tool.

Recent reports from the New York Fed and the Congressional Budget Office have both found that contrary to the president’s view on tariffs, they ⁠are almost entirely borne by those inside U.S. borders. The outlook for the tariff system has been clouded by a Supreme Court ruling that Trump's sweeping levies exceeded his authority, although Trump followed that decision with the imposition of even more tariffs on goods coming into ⁠the U.S.

The regional Fed report also looked at usage of artificial intelligence technology by small firms last year and found rising adoption and little job market displacement.

Just shy of half of small firms are using AI and 15% plan to ⁠add it to their operation in the next year, the report said. The Fed survey said the main use for AI so far is writing and marketing followed by individual productivity. AI did not change labor costs but it did enhance productivity for many firms, the report said.

Source: Reuters

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