Setting the Stage
Small businesses are navigating one of the most complex economic environments in years. Rising costs, global uncertainty, and shifting demand are forcing owners to rethink how they operate—and what comes next.
Small businesses have spent the past few years navigating one challenge after another—but the current environment may be the most complex yet. Rising costs, global instability, and shifting consumer behavior are colliding in ways that are forcing business owners to rethink how they operate.
To kick off National Small Business Week, I spoke with Ben Johnston, COO of Kapitus, about what’s happening beyond the headlines—and what it means for small businesses in the months ahead.
Rieva Lesonsky: Small businesses are facing a mix of challenges right now—from rising costs to global instability. How would you describe the current economic environment they’re operating in?
Ben Johnston: The current economic environment is uncertain. On the one hand, unemployment remains low, consumer spending remains steady, and low taxes and technology advancements are helping some businesses grow profitably. On the other hand, a volatile tariff strategy, elevated oil and gas prices, supply chain disruptions, and a rapidly changing technology landscape combine to create tremendous uncertainty for small business owners.
Lesonsky: We’re seeing rising geopolitical tensions, including concerns about oil supply disruptions. How do events like these translate into real-world impacts for small businesses in the U.S.?
Johnston: Rising oil prices are yet another shock to operating margins that small businesses need to contend with. Almost a year ago, small businesses were contemplating the impact of “Liberation Day” tariffs imposed on nearly all of our trading partners. Over the course of the year, small businesses learned to navigate these tariffs, altering supply chains and onshoring as much production as possible to avoid the tariffs’ most painful effects.
At the same time, businesses grappled with stubbornly high inflation and interest rates, which combined to further reduce small-business margins. Now, with the surge in oil prices, small businesses are once again grappling with the impact of an unforeseen expense and agonizing over whether to pass these increased costs on to an already stretched customer base.
We expect many small businesses will likely delay raising prices as long as possible—similarly to when tariffs were first introduced—but that businesses will ultimately need to pass these expenses on to customers should prices remain elevated for several months.
The uncertainty caused by this spike, and the lack of clarity about its severity and duration, will likely prompt many small businesses to retrench, holding off on starting new projects, taking on new hires, and investing in their growth until the picture becomes clearer. Given the importance of small businesses to the U.S. economy, this could have a significantly negative impact on the unemployment rate and overall GDP growth.
Lesonsky: If energy prices remain volatile, where will small businesses feel that impact most quickly?
Johnston: One of the industries with the highest dependency on oil and gas prices is the transportation industry, which includes long-haul trucking as well as short-haul and local delivery services. Fuel oil is one of the transportation industry’s primary operating expenses, and operators will feel the impact of this disruption immediately.
The agricultural industry is also highly exposed, given the diesel-powered heavy machinery used in production, the distribution costs required to get products to consumers, and the fertilizer needed to maintain crop yields.
Many small manufacturers also have significant exposure, as oil and gas are often used directly in the manufacturing process, to generate electricity for power plants and equipment, or in the production of raw materials such as plastic, aluminum, and steel.
In addition, the construction industry has significant exposure to the petroleum markets, given the heavy machinery used in construction and the building materials required in modern construction.
The restaurant industry will also experience higher fuel oil and cooking gas costs, as well as higher food costs due to higher transportation and production costs.
On the positive side, the U.S. has a robust oil and gas industry that employs many small businesses involved in both upstream and downstream production. These businesses will benefit from higher prices, which, if sustained for a long enough period of time, make additional oil and gas projects economically viable.
It is also important to note that, as the world’s largest oil and gas producer, the U.S. is less exposed to economic disruption than many other developed economies, especially those in Europe and Asia. As a result, it is likely that fuel costs will rise higher and faster in parts of the world where we are currently levying tariffs to drive production back to the United States. If U.S. oil prices become a relative advantage for U.S. businesses, it may help accelerate the repatriation of manufacturing back to the U.S. during this period of instability.
Lesonsky: Supply chains have been under pressure for years now. Are we entering a new phase of disruption, or is this more of a continuation of what businesses have already been dealing with?
Johnston: Supply chains have been unstable ever since COVID, when demand changes, production challenges, and labor shortages sowed chaos worldwide. Since then, global conflicts in Ukraine, the Red Sea, and the Strait of Hormuz, along with drought in the Panama Canal region and a stuck tanker in the Suez Canal, have combined to wreak havoc on international shipping. With Iran’s recent success in closing the Strait of Hormuz, the fear is that more militant actors will emerge with the goal of disrupting global trade in search of profit.
Lesonsky: Consumer spending has held up in many sectors, but confidence remains low. How should small businesses interpret that disconnect?
Johnston: Consumers feel less certain about the future than they did in years past. Home and education prices are at historic highs, and labor participation is low by historical standards. Today, the wealth gap is wider than at any time since World War II, and workers are increasingly concerned about the future of their employment amid technological advances in automation and AI.
As a result, small businesses should tailor products for the consumer segment they are trying to reach. Wealthy consumers are spending heavily on luxury items, while less fortunate consumers are spending on lower-cost items with high utility and value. It is important for small business owners to know the difference and design products accordingly.
Lesonsky: With costs rising and demand uncertain, how are small businesses adjusting their approach to pricing, hiring, and investment?
Johnston: Small business owners are taking a cautious approach to expansion, given the current economic environment. They are testing new markets on a small scale and confirming demand before investing heavily in new strategies. They are also looking for automation and AI solutions to reduce headcount and their dependence on volatile labor markets.
Lesonsky: Where do you see the biggest risk for small businesses in the months ahead?
Johnston: The biggest risks to the economy come from rising inflation, which could lead the Federal Reserve to raise interest rates. At the moment, inflation appears under control, and many economists anticipate the Fed will cut interest rates before the end of the year. But if rising energy costs and supply chain disruptions lead to higher inflation, higher interest rates could follow, depressing growth and corporate earnings.
Lesonsky: Even in uncertain times, there are always opportunities. Where are you seeing small businesses find ways to adapt or grow?
Johnston: There are many new businesses emerging to take advantage of the AI wave. There are new businesses using AI to provide a range of services, from marketing to technology development to design. We expect to see many new businesses formed in the coming years as large corporations downsize and a new generation of entrepreneurs embraces technology to create a new economy.
Lesonsky: What’s the most important thing small business owners should be doing right now to prepare for what’s ahead?
Johnston: Successful businesses today maintain options in their supply chain, their headcount, and in their access to capital. Many businesses today are investing in automation to control more of their supply chain and reduce dependency on human capital.
With recent advances in AI, many businesses are adopting AI tools to connect with and manage customers, handle accounting and business analytics, and even develop software. Successful businesses also maintain multiple financial relationships capable of providing working capital to fund growth. Many also finance equipment purchases and maintain revolving lines of credit to manage month-to-month cash flow volatility. It is important for small businesses to maintain both bank and non-bank relationships to ensure access to a full suite of financial products.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
Photo courtesy TSD Studio for Unsplash+
