2025 Small Business Outlook

Twenty twenty-four will be remembered for many things, but the soft landing of the U.S. economy and the reelection of Donald Trump as President of the United States will likely prove most significant.  Both were a surprise to many experts and seem to tell conflicting stories about the health of the U.S. economy, but both will have a huge impact on small businesses in 2025 and for years to come.

To observers on Wall Street, within the Federal Reserve, and inside the Democratic Party, 2024 was the year that inflation was tamed and GDP continued to grow, while consumer spending remained strong and unemployment low.  The stock market, led by technology innovations and AI exuberance, soared accordingly.  But to vast numbers of Main Street Americans, prices remained uncomfortably high, wages stagnant, housing scarce and expensive, and while unemployment was low, good paying jobs with dependable shifts and quality benefits were elusive.  The electorate voted for changeaccordingly.

The key question for small businesses is how the economy will change in 2025, and more specifically, how the political and economic changes that have been promised by the Trump Administration will impact inflation, interest rates, unemployment, taxes, and tariffs.  Will these changes be a net positive for small business owners?  And if so, which industries will benefit over others?

To answer these questions, we look to the promises made by the incoming Trump Administration whose platform focused on lower taxes, less regulation of business and the environment, less immigration and the expulsion of the undocumented from the United States, higher tariffs on goods manufactured abroad, and a more efficient federal government.  Which of these promises will be kept?  Which will be stifled by opposition?  And which will be used as bargaining chips to achieve other goals?  We anticipate a combination of outcomes, but that the tide will trend toward lower taxes, tighter labor markets, higher tariffs, and continued economic stimulus in the form of wide budget deficits.  As a result, we expect the economy to grow in 2025 but also expect inflation to accelerate.  Small businesses will have a difficult balancing act of capturing economic growth, while weathering accelerating costs.

How Will the Small Business Economy Fare in 2025?

• Inflation: The Federal Reserve has succeeded in bringing inflation under control without causing a recession, a feat many of us viewed as unlikely when inflation peaked at nine percent in June of 2022.  Unemployment remained low throughout the tightening cycle and wage growth is helping consumer purchasing power catch up to prices which today are rising more slowly.  The Federal Reserve switched to a loosening bias in the fall of 2024 and has indicated its intention to continue loosening so long as the economy does not grow too fast, and inflation remains low.  Inflation now sits at 2.7 percent and we expect it to drift lower throughout 2025, barring a major policy intervention or significant changes to Fed policy.  However, we view many of the stated policy goals of the incoming administration as inflationary.  Specifically tax cuts, tariffs and expulsion of the undocumented.  Were these policies to be enacted in their proposed form, the U.S. economy would almost certainly experience another inflation shock.  Fortunately, many of these proposals appear to be starting points in a negotiation rather than settled policy.  The business community, fresh on the heels of the last inflation shock, will be watching these policy changes closely and are prepared to act quickly should inflation return.

• The Global Supply Chain: The global supply chain today is functioning better than it was several years ago as we emerged from the pandemic.  However, critical issues continue to challenge small businesses sourcing materials and selling overseas.  During 2024, persistent disruptions in the global supply chain stemming from wars, pirating, strikes, infrastructure failures, and inclement weather combined to disrupt the global flow of trade.  Now, the threat of significant tariffs on large U.S. trading partners are forcing wholesalers, retailers, manufacturers, and many other business owners to reexamine their supply chains and develop sourcing strategies that reduce the cost of tariffs while still ensuring the timely delivery of goods.

We expect the economy to grow in 2025 but also expect inflation to accelerate.  Small businesses will have a difficult balancing act of capturing economic growth, while weathering accelerating costs.

Small businesses have learned from previous disruptions the benefits of shorter supply chains and greater onshore production, and today with the added threat of large tariffs, these benefits are amplified.  As a result, we expect to see continued growth in domestic manufacturing and the integration of new technologies that promote automated production.  While we expect the growth in U.S. manufacturing and automation to be net positives for the U.S. economy, we are very worried that the pace of this change will be highly disruptive to the global supply chain, and we hope that whatever changes are made are implemented in a gradual and deliberate manner.

• The political environment: The Trump Administration enters office in January having won a clear mandate for change.  Exactly what this change entails is still an open question, but it is safe to assume that it will include lower taxes, less regulation, smaller government, higher tariffs on imported goods, tighter immigration standards, and a reduction in the undocumented population.  Lower taxes and less regulation will clearly be embraced by the business community while the long-term popularity of the other initiatives is debatable.  What is clear is that business owners will be watching these developments closely as they will impact inflation, the cost of capital, the cost of goods sourced overseas, and overall economic demand.

Which Industries Will Outperform in 2025? Which Are Likely to Struggle?

• Restaurants: The restaurant industry grew steadily in 2024, as strong employment trends and positive economic growth fueled consumer spending.  We expect this trend to continue in 2025 as low unemployment provides consumers sufficient discretionary income to afford eating out on a regular basis.  However, the currently tight labor market could be exacerbated by a crackdown on the hiring of undocumented labor.  It is estimated that 10 percent of all restaurant employees are undocumented as are at least 25 percent of all agriculture employees, according to  the Pew Research Center.  A significant loss of undocumented labor could force both the cost of labor and food for restaurants considerably higher.  Costs that would need to be passed on to consumers.

• Hospitality and Travel: The hospitality industry, like the restaurant industry, grew in 2024 as consumers increased spending on travel and experiences while spending less on large-ticket purchases such as home and auto. We expecthospitality and travel to continue to grow at the pace of the overall economy in 2025.  We expect hotels, conference centers and the airlines to benefit from continued growth in business travel, as businesses emphasize in-person gatherings among a now decentralized workforce.  Resorts, cruises and theme parks should also benefit from continued consumer demand as long asunemployment remains low and consumer spending strong.  However, given that an estimated 9% of the hospitality industry is undocumented, a change in immigration policy could have an outsized impact on the industry’s ability to fulfill customer demand.

• Retail: Retail sales grew steadily in 2024 as the American consumer benefitted from strong employment and wage growth.  Discretionary durable goods such as home furnishings and jewelry improved, while recreational goods, clothing and footwear also saw an increase in spending.  Without the threat of tariffs, we would expect retail sales to continue to grow in 2025, assuming employment remains strong.  However, no industry is likely to be hit harder by an increase in import duties than the retail sector, as a high percentage of retail goods areimported.  In total, approximately 11% of all consumer spending goes to purchase imported goods, but the percentage retail sales made up of imported goods is much higher.  In response to the threat of increased tariffs, many retailers are trying to pull purchases forward, hoping to import as much aspossible before the inauguration.  Unfortunately for them, this is only a temporary solution, and we expect retail to be one of the hardest hit industries should additional tariffs be implemented.

• Construction and Home Improvement: Despite moderate rate cuts in 2024, mortgage rates remained high throughout the year, further slowing new housing starts and existing home sales. As a result, sales of home furnishings, home improvement supplies, and demand for residential construction servicesremained relatively flat.  

The current shortage of affordable housing in the U.S. should be a catalyst for growth in 2025.  However, we are concerned that interest rates will remain high throughout the year as the Fed is forced to scale back anticipated rate cuts due to inflation.  We are also concerned that additional tariffs will raise the cost of building materials significantly.  Especially tariffs on Canada (lumber), Mexico (appliances), and China (iron and steel).  In addition, an aggressive move to remove undocumented labor from the country could make an already tight labor market even tighter.  It is estimated by the Pew Research Center that approximately 15 percent of construction workers in the United States are undocumented.  A significant loss of workers would limit the ability to take on new jobs, while driving up the overall cost of labor, creating a difficult environment for contractors and homeowners alike.

• Healthcare: We continue to be bullish on the healthcare industry as the macro forces of an aging U.S. population, and new treatment innovations makehealthcare an attractive industry in 2025 and beyond. However, proposed changes to Medicare which give more control of the program to the states and proposed work requirements in exchange for coverage, may serve to limit the total number of insured.  In addition, staffing shortages across the industry from hospitals and clinics to home healthcare workers will be exacerbated by limits on immigration and deportations of undocumented workers.  While it is estimated that only 2% of the healthcare workforce is undocumented, a much higher percentage of nurses and doctors are legal immigrants.  A reduction in future legal immigration could pose a significant challenge to the industry and drive both prices and wait-times higher.  Despite these challenges, the healthcare industry will continue to thrive, as will veterinarians who have benefitted in a surge of pet ownership post pandemic.

• Manufacturing: The U.S. manufacturing sector proved resilient in 2024 as it facedpersistent disruptions in the global supply chain from attacks on shipping by the Houthis in the Red Sea, to a drought that limited traffic through the Panama Canal, to a bridge collapse that closed the Port of Baltimore, and a Port Strike on the Eastern Seaboard.  We expect 2025 to present an even greater challenge for manufacturers as they navigate the potential impact of new tariffs on their ability to source raw materials and components from abroad.  However, we also see tremendous upside for U.S. manufacturers who are poised to benefit from U.S. tariffs that protect them from foreign competition and provide incentives to expand domestic production.

As a result, we expect to see continued repatriation of manufacturing to the U.S. in 2025 as businesses seek shorter and more reliable supply chains and work to avoid the cost of new tariffs.  However, because so many manufacturing components are sourced overseas, domestic manufacturers will need to explore vertical integration strategies or locate components closer to home if they are to avoid the impact of these tariffs on their expense base.  Growing manufacturers will also need to contend with the challenges of staffing in a tight labor market,given new immigration restrictions and the potential expulsion of undocumented workers.  It is estimated that approximately five percent of U.S. manufacturing labor is undocumented, according to  the Pew Research Center.

• Automotive: The auto industry saw a decline in sales in 2024 across both new and used vehicles as high interest rates and a hangover from the purchasing binge of the post-pandemic consumption era reduced demand.  While this was troubling for dealerships and manufacturers, a slowdown in car sales can actually be good news for automotive repair shops as older cars need more maintenance. We expect 2025 to be another challenging year for dealers, manufacturers and consumers alike as new tariffs raise the costs of purchasing new vehicles.  However, we continue to be bullish on the auto repair industry which will benefit from an aging vehicle fleet.

Although 2025 presents considerable economic uncertainty, we are optimistic that the economy is poised for continued growth so long as inflation remains low.  While considerable change is expected on the political front, we also understand that the economy is in the forefront of the mind of the incoming President who has historically measured his performance by the trajectory of the stock market and his place in the polls.  

As a result, we expect market-friendly policies to prevail and believe that now may be a good time for business owners to be working on a growth plan, while also having contingency plans in place should inflation creep back into the picture.  This means determining what financing a business is likely to need in either scenario.  While many banks have scaled back their exposure to businesses credits, there are manynon-bank small business lenders that are ready to fill the funding gap left when banksbegan to tighten.  As the political uncertainty wanes, and a clear view of the economy unfolds, we expect 2025 to emerge as a prosperous and exciting year for businessowners.  The most critical growth engine of the American economy.