With a new year fully upon us, small business owners across the nation are hard at work getting W2s to their employees, preparing tax forms or focusing on implementing new strategies designed to make 2025 a success. As with any new year — particularly one that brings a change in presidential administrations — fresh anxieties and concerns abound in the small business sector. Some wonder how new legislation will impact their business, while others worry about inflation.
With that in mind, we turned to Ben Johnston, chief operating officer of Kapitus, a company that specializes in small business finance. Johnston put together some key insights and takeaways about how inflation, supply chain issues, potential tariffs and the changing political environment will impact small businesses this year. We think you’ll find his thoughts and predictions interesting and useful.
2024 Market Overview
“2024 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,” says Johnston. “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 change accordingly.”
So, how will these changes affect the economy in 2025? How will inflation, interest rates, unemployment, taxes and tariffs be impacted?
“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,” says Johnston. “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.”
Will Economic Uncertainty or Optimism Rule the Day?
“Although 2025 presents considerable economic uncertainty, we are optimistic that the economy is poised for continued growth so long as inflation remains low,” says Johnson. “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 many non-bank small business lenders that are ready to fill the funding gap left when banks began 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 business owners, the most critical growth engine of the American economy.”
Factors Impacting Small Businesses in 2025
Inflation, the global supply chain, the American political environment and tariffs all raise concerns for small business owners at the moment. Here are Johnston’s takes on these issues:
- 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 9% in June 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 fall 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%, 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.
- 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.”
- Increased Domestic Manufacturing: “Small businesses have learned from previous disruptions about the benefits of shorter supply chains and greater onshore production. 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.”
- 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.”
- Tariffs: “President-elect Trump has proposed various tariff plans at various times on the import of foreign goods including a 10% blanket tariff on all imports, a 60% tariff on Chinese goods and 25% tariffs on goods from Mexico and Canada. Tariffs of this significance could, over time, make manufacturing in the U.S. more economical relative to importing goods from abroad, which could be good for some industries. But in the short- to medium-term, these tariffs are likely to drive inflation significantly higher and cause significant disruption to the global supply chain, threatening many U.S. jobs at manufacturers, wholesalers and retailers who rely on the global supply chain to source the components, raw materials, and finished products they sell.”
- Response to Tariffs: “Higher tariffs will certainly cause prices to rise for U.S. consumers, as tariffs drive up the cost of the product being imported, and these costs must be passed on to the customer. This will not only spur inflation but will lower overall consumption, slowing the economy. However, in the long run, higher tariffs may help protect the viability of certain U.S. manufacturers and could incent greater investment in U.S. manufacturing. While this would be a positive for some sectors of the economy, the impact of tariffs is difficult to predict as we can expect U.S. exports to impacted nations to be struck by retaliatory tariffs, reducing demand for goods produced in the U.S. and sold abroad.”
Later this week, we will run a second installment. The follow-up piece will cover Johnston’s assertions about how the issues mentioned in this article could impact various U.S. industries.