By Ben Johnston, Chief Operating Officer of Kapitus
For small business owners in the construction sector, 2025 was a year consumed by the promise of change and the fear of what that change would bring. The year began with the Trump Administration’s return to power and optimism that low taxes and lighter regulation would deliver an economic boom. While the Administration delivered on these promises, it also delivered a volatile tariff strategy, a crackdown on undocumented immigration, and little change to the affordability issues troubling consumers. The net result has been anxiety for consumers who feel they are falling behind and for home builders and contractors who depend on consumer spending (homebuying and improvements) to drive revenue.
Small business owners in the construction sector are also working to position themselves in the emerging “K-shaped” economy. Named for the split recovery Americans experienced coming out of Covid, the K-shaped economy is one in which the wealthiest Americans drive growth in consumer spending, while everyone else suffers under rising inflation, slower wage growth, and higher unemployment. Well-off Americans with real estate and investment portfolios continued to prosper in 2025 as rising home prices and financial markets fueled wealth accumulation, while younger Americans – those saving to buy a home and one-day retire – saw these goals slip further from reach. The result is a bifurcation of the market, with one set of consumers focused on luxury and the other stretching every dollar. In this environment, small businesses are struggling to identify their core customer and position their offerings appropriately.
America’s housing shortage continues to worsen as household formation grows faster than new homes can be built. This means consistent demand for contractors who build approximately 1.5 million new homes each year and are responsible for maintaining nearly 150 million housing units nationwide. We expect demand for housing to remain high for the foreseeable future as zoning restrictions restrict supply, creating demand for repair and refurbishment of America’s aging housing stock. However, tariffs on building materials and white goods, coupled with stubbornly high mortgage rates have made contracting services increasingly expensive. We expect to see continued growth in the high-end of the construction market and in conversions of commercial space to residential space, especially in major cities with housing shortages and high commercial vacancies.
In addition, we expect the construction of data centers, warehouses and modern manufacturing facilities to drive growth in construction during 2026. We are also watching for new, less labor intensive and more efficient, forms of housing construction, such as 3-D printed homes, to gain market share.
As we move into 2026, we expect the K-shaped economy to continue as AI adoption generates a reduction in demand for labor, faster than the economy can create new jobs. We expect the current tax and tariff structure to largely remain in place, and we expect continued economic stimulus in the form of wide budget deficits. As a result, we see the economy growing in 2026, driven by efficiency gains, technology investment, and economic stimulus, but expect growth in consumer spending to be subdued as unemployment rises. Given this dichotomy, small businesses face a difficult balancing act of serving a bifurcated customer base while investing in new technologies and navigating a turbulent economy.
Factors to Watch in 2026:
Inflation, Employment and Productivity: The Federal Reserve’s interest rate policy balances its desire to maintain a robust economy and full employment with its desire to limit inflation. The Fed cut interest rates three times for a total of 75 bps in 2025, on top of three cuts for 100 bps in 2024. These cuts do not appear to have stoked a meaningful change in inflation to date, but as tariffs become permanent and the government continues to spend trillions more than it collects in revenue, the threat of inflation remains constant.
One of the greatest weapons against inflation will be productivity growth. Today business leaders and economic experts seem to be pinning their hopes on new AI technologies to usher in an age of automation and rapid productivity growth. History has proven that new technologies take years to work their way into business processes, so we do not expect a silver bullet cure for inflationary pressure. However, we do believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs. In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the economy evolves.
The unemployment rate rose in 2025 from 4% in January to 4.6% in November and we expect it to continue growing in 2026, despite a reduction in the immigrant labor pool. Unemployment is especially high for younger Americans with less experience, and we see entry level jobs being the first jobs being automated away by AI. We can only hope that the dynamism of the US economy is able to create new, inspiring roles for those being displaced by automation.
Tariff Policy and the Political Environment: The Trump Administration entered office in January 2025 determined to deliver on its promise of lower taxes, less regulation, smaller government, higher tariffs, tighter immigration, and a reduction in the undocumented population. Objectively speaking, it has delivered on most of these goals. However, it remains to be seen whether these policies will deliver the growth, low inflation, and improved employment prospects for the middle class that were promised along with these policies. Early indications are mixed.
What we do believe is that the tariff increases of 2025 are here to stay. We do not expect the Supreme Court to rule against the Administration’s ability to impose tariffs in a way that would meaningfully reduce their impact going forward or cause the money collected to date to be repaid. We expect current economic policy to remain in place through the swearing in of a new Congress in January 2027, with a bend toward higher tariffs and lower interest rates. The combination of these policies has the potential to drive inflation higher while the unemployment rate continues to rise.
Manufacturing: Perhaps no industry is poised to benefit more from America’s evolving tariff policy than the manufacturing industry. The tariffs introduced in 2025 were designed to protect U.S. manufacturers from “dumping” and other forms of unfair foreign competition, while providing incentives to expand domestic production. While we see these goals as favorable to the industry, we are skeptical that tariffs alone will usher in a new “golden age” of U.S. manufacturing. The reality is that American regulation, labor costs, and lack of integrated domestic supply chains continue to put American manufacturers at a disadvantage. Those manufacturers that do operate in the U.S. often import critical raw materials and component parts through Asian supply chains, most of which are now subject to tariffs. The net result is a slightly more favorable operating environment for domestic manufacturers, but one that fails to recreate America’s manufacturing dominance of the 1950s and 1960s.
Going forward, we expect to see continued repatriation of manufacturing to the U.S. as businesses seek shorter supply chains and work to avoid the cost of tariffs. However, despite growth in U.S. GDP from domestic manufacturing, we do not expect to see a meaningful growth in employment. In fact, in 2025 while total U.S. manufacturing production rose, the total number of Americans employed in the manufacturing sector fell. We attribute this to increased automation in the sector, a phenomenon that will only be enhanced by increasing adoption of robotics and AI technologies. We are believers in the future of American manufacturing and the importance of maintaining a competitive domestic manufacturing base. But we do not expect this rebirth to generate significant new jobs capable of reversing the effects of the K-shaped economy.
Conclusion
We expect 2026 to be a year of rapid technological advancement that places pressure on small business owners to combat higher costs and lower margins with the adoption of new technology. Small businesses will also need to keep a laser focus on the needs of their customer base. Understanding which arm of the K-shaped economy a business is serving will be essential to success. To navigate changes in government policy, technology, and consumer spending, small businesses will need to be nimble and have access to flexible financing solutions. This means determining what financing they are likely to need and developing relationships with a variety of financial services providers. While many community banks have been consolidated into larger regional institutions, and others have scaled back their exposure to commercial credits, there are many non-bank small business lenders that are ready to fill the funding gap. Despite considerable uncertainty, we expect 2026 to be a prosperous and exciting year for small business owners and look forward to providing growth capital to this community, the most critical growth engine of the American economy.
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About the Author:
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business finance. Kapitus provides growth capital to small businesses and has provided over $8.5 billion to over 50,000 small businesses since 2006. Kapitus offers multiple loan products to small businesses, including SBA loans, revenue-based finance, equipment finance, cash-flow based factoring, revolving lines of credit and invoice factoring.