Helping small and mid-sized businesses navigate the current economic landscape

Small and mid-sized businesses (SMBs) are being squeezed from all sides. Tariffs are driving up input costs, inflation is eroding margins, and shifting federal and state regulations are adding new layers of complexity. These aren’t abstract trends or distant possibilities; they’re real pressures unfolding in real time, and the forces behind them are reshaping how SMBs operate day to day.

Add in the impacts of the war in Iran, and with so many stressors hitting at once, SMBs are being forced to make high‑impact decisions faster than ever, often with imperfect information. For business owners, better understanding the economic and market dynamics at play has become critical to navigating a landscape that’s only growing more demanding.

To help address some of the challenges facing SMBs today, Amy Friedrich, President, Benefits and Protection, spoke with Principal’s Seema Shah, Chief Global Strategist, and Chris Payne, Senior Vice President, Government Relations.

The U.S. economy is very strong, with GDP growth recorded at 4.4% in the third quarter, well above the trend rate. Although growth slowed sharply in the fourth quarter, that was largely due to the government shutdown. However, such positive macroeconomic data contrasts sharply with the negative sentiment expressed by small and medium-sized business owners and consumers alike, raising questions about the realities of economic indicators and their relevance to day-to-day business operations. It indicates underlying anxieties about localized economic conditions. SMB owners, perhaps more so than large businesses, are attuned to factors affecting their immediate environment, such as market demand, regional economic health, and operational costs.

So, what’s behind this disconnect between the healthy GDP growth and low unemployment rates, and the negative sentiment seen in surveys? Several factors are at play:

• Inflation and rising operational costs contribute to everyday challenges. The recent intervention in Iran also adds to operational cost pressures as oil and gasoline have jumped in response.

• Labor shortages are also a factor, simply because business owners are finding it harder to hire qualified workers.

• Regulatory changes can introduce uncertainty, making it harder for SMBs to maintain profit margins. Will today’s federal deregulation just be reversed with massive reregulation, as seen during the Biden Administration? Will state regulation just offset federal deregulation?

• Volatile commodity prices driven by geopolitical issues—such as tariffs— can (and have) further complicated the outlook for many SMB owners.

In total, these factors often make it harder for SMBs to maintain profit margins.

On the consumer side, household wealth has surged by almost $70 trillion since COVID, but these gains have been concentrated at the top of the income spectrum. The highest earning 20% of U.S. households now hold about 80% of total net worth, and the top 10% account for roughly half of all consumer spending. This concentration helps propel strong headline GDP figures, since consumer spending drives much of U.S. economic activity. Yet it also masks the reality that most households—and many small and mid-sized businesses—are still contending with tighter budgets, higher costs, and far less financial cushion.

Furthermore, although the unemployment rate remains low, the pace of job creation has slowed markedly. At the same time, lower and middle-income workers increasingly worry that artificial intelligence is displacing not only low-skilled roles but also entry-level white-collar positions. This shift has led to a sharp decline in voluntary job quitting and a noticeable rise in anxiety among these groups, as workers feel less confident about securing better opportunities elsewhere.

These rising anxieties among workers and small businesses are increasingly showing up in what policymakers are hearing on the ground. Across Washington and in state capitals, officials regularly note the disconnect between strong headline economic data and the more unsettled sentiment coming from business owners in their communities. From our perspective, a major driver of that uncertainty is the constant noise around potential policy shifts.

For example, the volatility around tariffs is still unfolding, even after the February Supreme Court ruling found the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) unconstitutional. In response, the Trump Administration announced a new 10% “global tariff,” invoking Section 122 of the Trade Act of 1974. He subsequently signalled his intention to raise the tariff to 15% (the maximum level permitted under this authority), though the timing of that increase has yet to be clarified.

At the same time, state legislatures are struggling with budget pressures, particularly those that expanded spending aggressively after COVID. Addressing these gaps may require reducing or eliminating government services that constituents—including SMBs—rely on, as well as adjusting local tax policies in efforts to raise revenue. All of these crosscurrents complicate planning for SMBs, with many business owners choosing to pause investment or hiring decisions until they see how policy conditions settle.

Affordability remains a pressing concern for both Democrats and Republicans as they look toward the midterm elections in November. There’s little doubt that the topic will be the critical issue driving voters to the polls. How the narrative around affordability plays out over the next several months will likely determine who controls the House of Representatives and, perhaps, even the Senate.

Tariffs have taken up much of the attention, often overshadowing other important affordability topics that policymakers are working to address in advance of the election. These include:

• Electricity costs: Numerous local and national policy initiatives are being proposed to improve energy needs nationwide as AI-driven demand has fueled an acceleration in costs for consumers and businesses alike.
• Health care and insurance: Significant discussions are ongoing about rising health care premiums and the impact this has on SMBs. There has been increased focus on how insurance is utilized and why premiums are escalating. Questions abound about whether consumers are getting value for the premiums they pay. The conversation reaches well beyond the healthcare space, with property and casualty insurers also facing policymaker scrutiny over rising premiums and claims processing.

As the election draws near, these issues, alongside an evolving tariff environment, will collectively shape how voters experience and interpret affordability.

All these affordability pressures flow directly into the broader economic environment that business owners are trying to navigate. And while policymakers debate these issues, SMBs are confronting a more basic reality: prices are still far higher than they were before COVID, and that backdrop shapes nearly every decision they make.

There was an inflation problem in the years following the pandemic, and although inflation has come down meaningfully, it has remained above the Fed’s 2% target for almost five years. That persistence is increasingly problematic. Even as headline inflation cools, investors and business owners must pay close attention to the way tariff policy interacts with the inflation path. So far, tariff impacts have been less severe than initially feared. Still, any sustained increase in input costs would quickly be felt—particularly by SMBs, which generally have less bargaining power with suppliers than larger firms.

What really matters is the price level. Small and medium-sized businesses and their customers care less about inflation rates and more about how much prices have risen: how much goods and services cost today versus before COVID. Over the past six years, the inflation basket for an average household has increased by about 25%, meaning that goods and services are now 25% more expensive than they were then.

When those higher prices are viewed alongside household income data, it becomes clear why many Americans feel worse off. Wage growth for most of the income spectrum has not kept pace with the increase in the price level, leaving households with diminished purchasing power. The recent spike in gasoline prices will only intensify this strain. And the U.S. is far from alone; similar dynamics are playing out globally.

Policy choices have contributed as well. Tariffs have added to inflationary pressures and further strained affordability, with lower-income households disproportionately affected because they spend a higher share of income on tariff-impacted goods.

Although President Trump is likely to continue referencing tariffs or using them as a geopolitical tool—even following the recent Supreme Court ruling—he appears increasingly sensitive to affordability concerns heading into the election. This makes sweeping new tariffs less likely in the near term. In fact, recent actions suggest a more cautious approach: no new tariffs have been implemented since last September, and in November 2025, the administration rolled back tariffs on hundreds of staple food products, including coffee, beef, and bananas.

Legislative gridlock in Washington has shifted significant policymaking energy to the states, resulting in a regulatory landscape that now differs sharply from one jurisdiction to another. States have taken the lead in several high-impact areas, including employer-mandated retirement savings solutions, state-run retirement plans, worker access to paid family leave, and the imposition of dental minimum loss ratios.

For SMBs, especially those operating across multiple states, this means rising compliance burdens and greater uncertainty. These risks make it critical for SMBs to maintain visibility into state‑level policymaking.

To manage this complexity, SMBs should:

• Stay informed about both state and federal policy changes.
• Engage with local business chambers and industry-specific associations for insights and maximize their ability to voice concerns to policymakers.
• Proactively assess the potential impacts of upcoming regulations to strategize effectively and minimize disruptions.

Taken together, these actions can help give SMBs the clarity and agility they need to navigate an increasingly fragmented policy landscape.

One thing I hear a lot from small business owners is that regulation isn’t as simple as ‘less is better.’ In fact, two SMB owners we spoke with recently gave a more nuanced view. One in the food industry said they want inspectors showing up—because if they’re investing in food safety and their competitor isn’t, a lack of enforcement can hurt the responsible operator. Another in financial services told us the same thing: they rely on audits and oversight to keep the playing field fair.

As more policy shifts occur at the state level, another implication for SMBs is the need for consistency. They want clear rules, enforced evenly. Fragmented or uneven regulation creates uncertainty—and uncertainty can be expensive.

While the geopolitical environment can generate headline noise, and any sustained impact on oil prices could quickly change the outlook, the broader macroeconomic analogy still holds. Tariffs were essentially the “vegetables” of 2025: something companies and consumers had to absorb. In 2026, however, those pressures are being partially offset by the One Big Beautiful Bill, providing a degree of “dessert.”

Ultimately, the likely impact on households should be mixed:

• Larger tax refunds for most households: On balance, households should receive higher refunds in 2026 than they did last year. This will provide some support to consumer spending, though the size of the benefit varies significantly by income.
• Benefits skew toward higher income households: Because wealthier households pay a larger share of income taxes, they capture more of the refund-related advantages. Lower-income households see much less, limiting the boost.
• Tariff burden falls hardest on lower-income households: Consumers with lower incomes spend a larger share of their budgets on tariff-affected goods, so the cost pressure from tariffs eats more directly into their version of “dessert.”

There is clearer positive news on the corporate side:

• Effective corporate tax rates are set to fall from roughly 21% to about 15% for the average business, which is one of the main reasons forecasts for 2026 growth have been revised upward.
• Benefits can extend into 2027 and beyond if/when companies reinvest tax exemptions and incentives rather than treating them as one-off gains.
• However, gains are concentrated among larger firms. While the legislation paints a hopeful picture on paper, its advantages flow disproportionately to large corporations. SMBs receive far less of the upside, which limits the broader spillover effects for small and medium-sized business owners.

SMBs today face a complex mix of economic signals and regulatory pressures, yet they remain a critical source of innovation and economic strength. Navigating this environment requires awareness, adaptability, and engagement, whether that means staying up to date on policy developments or leveraging insights from trusted advisors. While uncertainty will persist, SMBs that approach these shifts collaboratively and proactively will be better equipped to manage risks and capture emerging opportunities. Growth is still within reach for those prepared to pivot.