May 2026 Main Street Lending Report: How Rising Prices, AI, and Changing Credit are Reshaping the Main Street Outlook

Highlights: 

• The economy is showing uneven growth, with consumer spending and concentrated AI-centric business investment accelerating (10.4% Q1 investment growth), while Main Street remains cautious due to high inflation (3.8% Y-o-Y) and tighter financing conditions.

• Small business credit performance is stable but has settled at a higher baseline, with defaults closer to 3% compared to pre-pandemic norms below 2%, making expense discipline and cash flow management critical for firms.

The data from the latest Main Street Lending Report continues to send mixed signals. Growth improved in the first quarter, consumer spending remains relatively steady, and business investment is accelerating. However, inflation has picked up sharply again, borrowing conditions remain tight, and small business sentiment has weakened. 

In March 2026, the Small Business Lending Index declined 5.5% from the prior month and is down 4.3% compared to March 2025. Lending activity has softened even as broader economic growth improved, suggesting that conditions on Main Street remain more cautious than headline economic numbers might imply.

At the same time, credit performance remains relatively stable. Short-term delinquencies have moved only slightly lower over the past several months, while longer-term delinquencies have remained largely flat. Defaults are running somewhat higher than pre-pandemic norms, but they are not currently showing signs of severe deterioration.

Historically, small business defaults generally remained below 2% for much of the 2012–2018 period. Following the disruptions of both the 2008 financial crisis and the pandemic, defaults have now settled closer to 3%. The key question is whether this represents a temporary adjustment period or a new long-term baseline for small business credit performance.

Several factors may be contributing to this shift. The composition of small business ownership may have changed in recent years, particularly following the surge in new business formation during and after the pandemic. A larger number of newer businesses could naturally lead to somewhat higher default rates over time. Industry composition also matters, as some sectors continue to face greater pressure from higher labor, financing, and operating costs than others.

For now, the overall picture remains relatively stable. Defaults are elevated compared to the pre-pandemic environment, but current levels do not yet suggest broad financial stress across Main Street.

The U.S. economy started 2026 on firmer footing, with GDP expanding at a 2% annualized rate in the first quarter after a sluggish end to 2025. Consumer spending and business investment were the primary drivers of growth, though the benefits have not been evenly distributed across the economy.

Consumer activity continues to hold up despite mounting pressures on household finances. Retail spending has remained relatively steady, even as real wage growth has turned negative due to rising inflation. In other words, after adjusting for inflation, household purchasing power has started to decline.

Part of the recent acceleration in household costs was expected, particularly in core prices, but the sharp rise in energy costs tied to the current global conflict has intensified those pressures. The broader economic environment is becoming more difficult for consumers than it was earlier in the recovery.

One notable trend is the growing divergence between spending on goods and services. Spending on goods has softened, while services spending continues to rise, driven in part by higher health care and essential services costs. Continued consumer spending may also reflect increased reliance on credit cards and other forms of borrowing, which could become a concern if higher interest rates persist.

For small businesses, the composition of consumer spending may become increasingly important in the months ahead. Businesses tied to discretionary goods could face more pressure if household budgets continue to tighten.

Business investment has emerged as one of the strongest areas of the economy in early 2026. Overall investment grew at a 10.4% annualized rate in the first quarter, the fastest pace in nearly three years.

However, much of that strength is highly concentrated around artificial intelligence infrastructure and related technologies. Investment in computer equipment, software, and information processing systems has surged, while other categories such as transportation equipment and residential construction have weakened.

This divergence highlights an increasingly uneven investment landscape. Large firms and technology-driven sectors are benefiting most directly from the AI expansion, but many smaller businesses remain focused on managing financing costs and preserving margins.

Even so, smaller firms may still benefit indirectly. Adoption of AI tools among small businesses continues to rise, with many firms using AI for operational workflows, customer engagement, and administrative functions. Over time, these productivity gains could help offset some of the pressure from higher labor and operating costs.

Inflation accelerated sharply again in April. Consumer prices rose 3.8% year-over-year, the highest reading in nearly three years, while energy prices climbed nearly 18% compared to a year earlier.

The current global conflict has played a major role in pushing oil and fuel prices higher, adding pressure across both households and businesses. Core inflation, which excludes food and energy, also continued to rise at a firm pace.

At the same time, labor market conditions remain relatively stable, with two consecutive months of solid job growth helping ease concerns about an immediate economic slowdown. However, stronger employment data combined with rising consumer prices makes it less likely that interest rates will move lower anytime soon.

Markets are increasingly pricing in the possibility that borrowing costs could remain elevated for longer than previously expected. Some analysts now see a meaningful chance of additional rate increases if inflation continues to accelerate.

For small businesses, this environment keeps financing conditions challenging. Credit remains available, but higher borrowing costs continue to pressure expansion plans, hiring decisions, and cash flow management.

Small businesses continue to demonstrate resilience, but the gap between headline economic growth and Main Street conditions may be widening.

Economic growth has improved, investment activity is strong in certain sectors, and consumer spending remains relatively stable. At the same time, inflation pressures, elevated borrowing costs, and softer small business optimism weigh on many firms.

Small business owners are navigating an environment that is increasingly uneven. Some sectors tied to technology and services are benefiting from stronger investment trends, while others remain under pressure from rising operating costs and slower discretionary spending.

The current outlook can best be described as resilient but cautious. Economic activity is continuing, but uncertainty around rising prices, interest rates, and consumer finances remains elevated.

The economy entered 2026 with stronger momentum, but the recovery is becoming more uneven beneath the surface. Consumer spending remains stable, though household purchasing power is weakening. Business investment is accelerating, but much of the growth is concentrated around AI-related industries.

Meanwhile, the increasing costs of consumer goods has reemerged as a major concern, driven largely by rising energy prices and ongoing geopolitical tensions. Higher borrowing costs are likely to remain in place for longer, creating additional pressure for small businesses.

For Main Street, the environment remains manageable but increasingly complex. Staying disciplined on expenses, monitoring cash flow closely, and adapting to changing consumer behavior will remain critical in the months ahead.

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Source:

Equifax, May 2026 Main Street Lending Report