Small-business owners are optimistic, but are they realistic?

OPINION:

As we head into 2025, small businesses seem optimistic — at least according to some recent reports.

Surveys from Intuit, the U.S. Chamber of Commerce, the National Federation of Independent Businesses, Thryv, ZipRecruiter and American Express, which polled thousands of business owners, point toward a brighter outlook.

The Intuit survey finds that 72% of business owners plan to invest in expanding their business, and 44% plan to hire full or part-time employees or contract workers in the coming year. The chamber says 7 in 10 small businesses expect next year’s revenue to increase, up significantly from a year ago. Forty-six percent say they plan to increase investments, and 41% say they anticipate increasing staff in the next year, also an increase from prior periods.

According to Thryv, half of those polled expect their revenue to increase in the first quarter, with 39% expecting their profit margins to also increase. ZipRecruiter says that 76% of surveyed employers say they plan to expand their headcount in 2025, with 53% anticipating modest increases and 23% expecting more significant growth.

An American Express study found that 91% of small businesses feel confident in their ability to grow — with nearly three-quarters saying they feel more confident than ever — and 92% are confident in their ability to prepare their company for the future. The NFIB reported that optimism among small-business owners, after 34 months of remaining below the 50-year average, reached its highest reading since June 2021.

It’s not hard to list why so many small-business owners feel bullish about 2025. Interest rates and inflation have been falling, the stock market is still buoyant and the incoming Trump administration promises lower taxes, fewer regulations and a pro-business environment, providing many managers a psychological boost. Add this to the sentiment that entrepreneurs are risk-takers and dreamers and tend to be optimistic, and you’ve got a solid basis for the rosy outlook. I’m a small-business owner, and I’m hoping — maybe even expecting — a few better economic years coming.

But let’s not get ahead of ourselves. Optimism is great, but we shouldn’t be naive. A few things could scuttle our plans for growth.

For starters, both inflation and interest rates are still high.

Inflation is around 3%, 50% higher than the Federal Reserve’s target. Higher prices for health insurance, utilities and certain core materials used by businesses are 10% to 30% higher than a few years ago. Add to that a prime rate of 7.5% (most businesses pay 1 to 3 points above that), and it’s easy to see why the costs of not only operating but also making capital investments remain challenging.

Debts and deficits will add to this problem in the short term.

Our government has an annual deficit of about $2 trillion. Our national debt is $36 trillion. Interest is consuming 8% to 9% of the federal budget. Tax cuts are great (see below) but don’t help generate the revenue needed to offset these deficits unless those cuts fuel significant economic growth. Spending keeps rising.

Why is this important for small businesses? Because if the government can’t pay down deficits, the only choice it will have to meet debt maintenance will be to print more money. Which means inflation isn’t going away. We may yearn for these days of 3% inflation.

Looming tariffs will create other challenges.

President-elect Donald Trump has been clear that he will raise tariffs on most of our trading partners when he takes office. Whether or not you believe in using tariffs as an economic and diplomatic negotiation tool, the prices of some products are bound to increase. Smart leaders will figure out ways to offset these increases by changing their suppliers, investing in technology, offering alternative products and bringing more of their purchases back to the U.S.

This will cause much disruption. Small businesses that rely on countries such as China for core materials will either have to find alternatives or raise their prices, which can affect demand.

Tax cuts are great, but don’t bet your farm.

Mr. Trump will push hard to extend or make many of the 2017 tax overhaul provisions permanent. But just because the GOP controls the House and Senate, this is not a done deal. Let’s not forget that 34 House Democrats opposed President Barack Obama’s Affordable Care Act, making the vote much narrower than the party’s majority.  We’ve already seen with some of the president-elect’s nominees that there are enough Republicans in both houses to ensure Mr. Trump won’t have an easy ride. Many tax proposals are up for debate, and I’m betting when the smoke clears, we won’t be seeing as many benefits as we’re expecting.

The regulatory environment will be confusing.

During the Biden administration, onerous rules regarding independent contractors, overtime pay, discrimination, harassment and union organization were enacted. Mr. Trump will likely overturn many of them. Others are being upheld in the courts. But this is not a long-term change because we’ve seen that incoming new administrations can reverse or initiate their own rules.

All of this makes things uncertain for businesses. Adding to that is Mr. Trump’s surprise pick of Lori Chavez-DeRemer to lead the Department of Labor. Ms. Chavez-DeRemer is known for being pro-union and supporting California’s Pro Act, which could lead to more regulations regarding independent contractors. Do businesses wait for the courts? Do they accept the regulations? Do they revert back? No one is sure.

The labor market will be even tighter.

Although down significantly from the pandemic, this country still has about 8 million open jobs and a historically low unemployment rate. Finding workers remains a top challenge for most businesses. Mr. Trump’s crackdown on immigration will focus on illegal immigrants who should not be employed by any law-abiding company. His immigration policies, however, are likely to extend beyond that and make it more difficult for immigrants not only to come to the U.S. but also to get legal status.

Barring a bipartisan legislative compromise, the likely drop in the supply of these workers will create further headaches for businesses looking to employ people to do the jobs that most Americans don’t want, or be forced to pay higher wages than usual to attract the workers they need.

Should small-business owners be optimistic? Why not? Positivity accomplishes great things. But being optimistic doesn’t mean you ignore reality. And the reality is that we will face serious challenges.

• Gene Marks runs The Marks Group, a financial and technology consulting firm near Philadelphia.