The Two Forces Shaping Main Street as the Economy Works to Regain Its Footing

Highlights: 

• Small businesses are navigating a challenging environment where resilient consumer demand is increasingly offset by rising input costs, which are compressing profit margins and limiting expansion capacity.

• Record-level global AI investment has emerged as a primary economic growth engine, creating a dependency where the continuation of broader market momentum hinges on sustained capital expenditures in computing infrastructure.

After a rocky start to the year, the U.S. economy appears to be regaining momentum.

Economic growth has strengthened, the labor market remains healthy, and consumers continue to spend despite persistently high prices. For now, those trends are helping support Main Street businesses and the broader economy.

The second half of 2026, however, may depend on two key factors that remain difficult to predict. Rising costs continue to pressure business margins, while the AI investment boom has become an increasingly important driver of economic growth. 

Small businesses continue to balance resilient demand with rising operating costs.

While lending activity has stabilized compared to the volatility seen earlier this year, many business owners are facing continued pressure from higher input costs. During the second quarter, 90% of small business owners reported paying more for the goods and services they need to operate.

Those rising expenses are beginning to outpace revenue growth, particularly among smaller firms. As profit margins narrow, business owners may become more cautious about hiring, expanding operations, or making new investments.

For lenders, this reinforces the importance of monitoring cash flow and profitability alongside traditional credit metrics.

Several economic indicators point to a healthier economy than many expected just a few months ago. Some of the strongest signals include:

• GDP rebounded to a 2.1% annualized growth rate after slowing sharply at the end of 2025. 

• Employers have added nearly 100,000 jobs per month on average during 2026, keeping unemployment low at 4.2%.

• Consumer spending continues to hold up, increasing 2.1% year-over-year after adjusting for inflation.

Taken together, these indicators suggest the economy has regained some stability after a turbulent start to the year. Now, the question is if that momentum can continue.

Rising operating costs remain one of the biggest uncertainties facing businesses.

Consumer prices increased 4.2% year-over-year in May, while core inflation, which excludes food and energy, also moved higher. Although oil prices retreated, uncertainty continues in energy markets.

For small businesses, these higher costs are becoming increasingly difficult to absorb.

Many firms are experiencing input price growth that outpaces revenue, compressing their margins and restricting financial flexibility. Ongoing heightened prices could compel businesses to confront challenging choices regarding pricing, recruitment, or future investments.

One of the biggest stories shaping today's economy is the investment in artificial intelligence.

Companies continue to invest heavily in data centers, computing infrastructure, and AI technologies. Goldman Sachs estimates global AI capital expenditures will reach $765 billion in 2026 and grow to $1.6 trillion by 2031.

These investments are doing more than fueling the technology sector. They are supporting economic growth, creating demand for construction and infrastructure, boosting corporate profits, and contributing to higher equity markets that strengthen household wealth.

The challenge is that much of this economic momentum now depends on continued AI investment. If spending slows because of higher costs, supply constraints, or weaker returns than expected, the effects could ripple well beyond the technology industry.

Main Street businesses are operating in a more stable economy than they were just a few months ago, but the current stability should not be mistaken for absolute certainty.

Persistently high operating costs continue to pressure margins, particularly for smaller businesses, while the economy has become increasingly reliant on unprecedented levels of AI investment. As businesses navigate the remainder of 2026, maintaining healthy cash flow, managing costs, and preparing for changing market conditions will remain essential.

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Source:

1. Equifax, July 2026 Main Street Lending Report