December Rebound, Cautious Optimism: What the Latest Data Means for Main Street
Highlights:
- Small business lending activity saw a strong rebound in December 2025 (+10.4% MoM) with credit quality remaining stable, signaling responsible debt management despite economic complexity.
- Small business owners are cautiously optimistic for 2026, though mixed economic data and the Federal Reserve's evolving interest rate policy create an uncertain market outlook.
As 2025 wrapped up, Main Street showed signs of renewed momentum. Lending activity improved in December, and small business owners remained cautiously optimistic about the year ahead. At the same time, mixed economic signals and ongoing uncertainty remind us that the road in 2026 may not come without headwinds.
In the February Main Street Lending Report, we break down what changed, what stayed steady, and what it all means for small business lending. Here’s the recap:
December Lending Rebounds as Credit Quality Holds Steady
December closed out the year with a welcome rebound in small business lending. Our Small Business Lending Index rose 10.4% from November, marking a strong month-over-month improvement. However, the index was still down 3.5% compared to December 2024. This tells a balanced story. Lending activity picked up at the end of 2025, but it has not fully regained the previous year’s pace.
Importantly, credit quality remained stable. Short-term delinquencies, which cover payments that are 31 to 90 days late, were flat in December. Severe delinquencies, those between 91 and 180 days past due, were also flat. Even more encouraging, defaults declined by 6 basis points. Stability in these measures suggests that small businesses are managing their debt responsibly, even in a complex economic climate.
Taken together, these trends show that while demand for credit has fluctuated, the overall health of borrowers remains solid heading into 2026.
Main Street Confidence in an Uncertain Economy
Small business owners enter 2026 with cautious optimism. Measures of sentiment have held steady around their historical averages. Many owners expect stronger revenue and profit growth in the year ahead. This optimism appears to be driven by hopes for better sales and improved business conditions.
The National Federation of Independent Business (NFIB) Small Business Optimism Index has hovered slightly above its long-term average in recent months. January showed an uptick in expected real sales volume over the next three months. This forward-looking data suggests that many owners believe the worst of recent uncertainty may be behind them.
However, there is another side to the story. The NFIB Uncertainty Index remains elevated. More owners report that they are unsure whether now is a good time to expand, reflecting a broader economic backdrop that is still filled with crosscurrents.
Hard Data Sends Mixed Signals
While confidence measures are relatively steady, harder economic data shows some softness. Small business profits declined on a year-over-year basis in both November and December 2025, according to analysis from the Bank of America Institute. Rising costs and slower retail spending appear to be weighing on margins.
Consumer behavior has also shifted. Retail spending was unexpectedly flat in December, as some households pulled back on large purchases. At the same time, payroll growth remains positive but has slowed compared to earlier estimates. While 130,000 jobs were added in January, total job growth for 2025 was revised downward.
Even so, the broader economy continues to show resilience. Gross domestic product grew at a strong 4.4% in the third quarter, and estimates point to another solid quarter in Q4, driven by consumer spending and business investment. Looking ahead, the Congressional Budget Office projects GDP growth of around 2.2% in 2026. That pace is more modest but still consistent with expansion.
The key takeaway is that the economy is not moving in one clear direction. Some indicators point to strength, while others suggest caution.
Lending Conditions May Gradually Improve
Credit markets reflect this same mix of optimism and restraint. The Federal Reserve Senior Loan Officer Opinion Survey shows that demand for small business loans remains subdued. Lending standards also continue to tighten. This trend means banks are being careful about who they lend to and under what terms.
At the same time, there are signs of future improvement. Nearly 30% of banks expect demand for small firm loans to rise in 2026. Only 7% expect demand to ease. That is a positive signal for Main Street, suggesting that many financial institutions anticipate stronger activity ahead.
Interest rates will play a central role in shaping this outlook. Federal Reserve Chair Jerome Powell is set to see his term expire in May. His likely successor, Kevin Warsh, previously held a reputation as an inflation “hawk.” Recently, however, he has expressed greater openness to lowering rates.
If the Federal Reserve adopts a less restrictive stance, borrowing conditions could ease. Lower rates would reduce financing costs, support expansion plans, and potentially boost lending volumes. Still, inflation remains above target, and any shift in policy will depend on incoming data and broader agreement within the Federal Open Market Committee.
What This Means for Main Street
As we move into 2026, the outlook for small businesses is mixed but not discouraging. Lending activity has rebounded from November lows. Credit quality remains steady. Optimism is stable, even as uncertainty lingers.
The broader economy continues to grow, though at a more moderate pace. Consumer spending and investment remain supportive, but retail softness and profit pressures warrant attention. Policy decisions from the Federal Reserve could become a key swing factor in the months ahead.
For lenders and small business owners alike, the message is clear: Stay attentive to both hard data and sentiment indicators. Watch interest rate policy closely. And remember that resilience has been a defining feature of Main Street in recent years.
December’s improvement in lending is a reminder that even in a cloudy environment, progress is possible. As always, we will continue to monitor these trends and provide updates on the forces shaping small business finance.
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