As the summer months stretch ahead, small business optimism is running into a wall of uncertainty created by escalating trade tensions and threatened tariffs. The latest Small Business Employment Watch from Paychex and IHS Markit reveals a troubling trend: hiring plans across America’s small businesses have cooled significantly as owners struggle to navigate an increasingly unpredictable economic landscape.
The data shows small business employment growth has slowed for the third consecutive month, with the national jobs index dropping to 98.18 in June, its lowest level in over eight years. This decline comes despite otherwise favorable economic indicators, suggesting specific factors are weighing on business confidence.
“What we’re seeing is a classic case of policy uncertainty translating directly into business caution,” explains James Diffley, chief regional economist at IHS Markit. “When small business owners can’t predict their cost structures with reasonable confidence, they naturally become more conservative with expansion plans.”
The tariff situation has created a particularly challenging environment for small enterprises that lack the financial resources and diversified supply chains of larger corporations. Unlike major companies that can absorb short-term disruptions or shift production overseas, small businesses often have limited options when faced with sudden cost increases.
According to a recent Federal Reserve Bank of New York survey, nearly 60% of small business owners report significant concerns about how tariffs might impact their operations in the coming year. More telling still, approximately 37% have already delayed or canceled planned investments due to trade policy uncertainty.
The effects aren’t uniform across sectors. Manufacturing and retail businesses are feeling the most immediate pressure, while service-oriented companies report less direct impact but growing concerns about broader economic effects if trade tensions continue to escalate.
Frank Williams, who runs a custom furniture manufacturing business in North Carolina, exemplifies the dilemma many small business owners face. “I had plans to bring on two additional craftsmen this summer, but I’ve put that on hold,” Williams told me during a recent interview. “Between the steel tariffs affecting my hardware costs and uncertain consumer demand, I just can’t commit to expanding payroll right now.”
This hesitation is particularly troubling because small businesses have historically driven employment growth during economic recoveries. They account for roughly 44% of U.S. economic activity and create two-thirds of net new jobs, according to the Small Business Administration.
Regional differences are becoming more pronounced as well. The Midwest, with its manufacturing base and agricultural connections, shows the steepest decline in hiring confidence. The Small Business Employment Watch indicates a 0.93% year-over-year decline in the region’s job growth rate, compared to a somewhat less severe 0.68% drop nationally.
Beyond direct cost implications, many business owners cite the psychological toll of operating in such an unpredictable environment. “The constant back-and-forth makes planning nearly impossible,” says Maria Delgado, owner of an import-export business in Texas. “One week we hear tariffs are coming, the next they’re delayed. How do you budget or forecast in that environment?”
The Federal Reserve has acknowledged these concerns, with Chairman Powell specifically citing trade uncertainty as a significant factor clouding the economic outlook. In Congressional testimony last month, Powell noted that business investment across the economy has “slowed notably” and linked this directly to trade policy uncertainty.
Economic research supports this connection between policy uncertainty and reduced business investment. A study from the National Bureau of Economic Research found that increases in policy uncertainty correlate with significant reductions in investment, particularly among companies that depend on government contracts or trade.
The timing is particularly unfortunate as the economy shows other signs of potential weakening. Manufacturing output has slowed, and consumer confidence, while still relatively strong, has shown signs of fragility in recent surveys. Small business hiring pullbacks could potentially accelerate any broader economic deceleration.
“Small businesses are the canary in the coal mine for the broader economy,” notes economist Sophia Chen of the Brookings Institution. “Their hiring decisions often precede larger economic trends by several months, which makes the current hesitation particularly concerning.”
Not all experts see doom and gloom, however. Some point out that fundamental economic indicators remain positive, with low unemployment and modest but steady growth. The theory among optimists is that resolution of trade uncertainties could quickly unleash pent-up hiring and investment plans.
The Treasury Department estimates that a comprehensive trade deal with China could boost U.S. GDP by 0.3-0.7 percentage points. For small businesses, clarity—even if it means some permanent tariffs—might be preferable to the current state of flux.
As Washington and Beijing continue their complex negotiations, America’s small business owners find themselves in an uncomfortable waiting game. Their collective decisions in the coming months may well determine whether the current economic expansion—now the longest in American history—can maintain momentum through year’s end.
The situation merits close monitoring, as small business sentiment often provides early signals of economic turning points. If hiring plans remain frozen heading into fall, it could portend broader economic challenges ahead. For now, small business owners are doing what they’ve always done in uncertain times: adapting, calculating, and carefully navigating an economic landscape that seems increasingly difficult to predict.
