REGIONAL – Small businesses in the Upper Midwest are facing significant economic challenges right now, as they struggle with the combined impact of tariffs, labor shortages, and general inflationary pressures. Those were among the findings reported on Tuesday when the Federal Reserve Bank of Minneapolis presented its general business survey for the Fed’s Ninth District.
The results reinforced the perception of a so-called “K-shaped” economy, in which large businesses are generally doing well while small businesses are hurting. Respondents, most of whom represented businesses employing fewer than 50 people, reported that high input costs and uncertainty about government policies, particularly tariffs, were driving down profits.
Those conditions are unlikely to be aided by this week’s imposition of extraordinarily high tariffs for many goods crossing the U.S. border with Canada as part of the launch of an unprecedented trade war between the two countries.
The survey is a snapshot, gathered from 1,073 businesses across Minnesota, Montana, North and South Dakota, the U.P. of Michigan, and northwestern Wisconsin between Jan. 12 and Feb. 6, 2026. The majority of responses came from greater Minnesota.
Over half of respondents reported lower profits, with small firms seeing a higher rate of losses. Respondents cited high input costs, driven by increased wholesale prices and inflation, as the top driver of lost profit. Many of those businesses said they were absorbing higher costs themselves in an effort not to drive away customers.
Businesses that did see increased profit usually attributed the gains to increased prices rather than higher demand.
Respondents also said they are struggling with high interest rates, government policies, and labor availability.
The share of respondents concerned with the effects of government policies on their businesses nearly tripled in the last year, from around 16 percent to over 45 percent. Of those government policies, tariffs stood out for their negative impact, according to surveyed business owners. Around 54 percent of respondents said that tariffs had a modest or significant negative impact on their business, while 33 percent said the tariffs had little to no impact. Fewer than ten percent said the tariffs had a positive impact. The remaining respondents said that they were not sure of the impact.
The semiconductor tariffs went into effect partway through the response period, which ended months ago.
According to the survey, hiring is slow. Sixty percent of respondents said they were not actively looking for workers despite high turnover. Of the businesses that are hiring, 70 percent said they found it “extremely difficult” to find workers. Respondents mentioned having more applicants, but fewer qualified candidates. Despite that, most respondents expect to increase their staff over the next six months.
Minnesota’s new paid medical and family leave program, which went into effect Jan. 1, 2026, also put pressure on small business owners, with respondents reporting staff shortages, administrative burdens, and additional costs.
Notably, the data contained very few mentions of artificial intelligence, or AI. Analyst Bill Wirtz, who led the Q&A portion of the presentation, said, “Its integration into business is not matching the visibility of the topic.”
Respondents reported wage growth overall, although the share of businesses with declining wages has grown slightly in recent months. Small businesses are disproportionately represented in this group as they struggle to compete with higher wages offered by larger firms.
Optimism among respondents is growing but is still mixed. Smaller businesses tend to be more pessimistic about the future.