Welcome to the February 2025 installment of The Economy Explained, with Gusto!

The job of the Gusto Insights Group is to make you smart about the economy to your clients, who we know are asking you questions about what they should do. In this video, we’ll talk about what’s happening in the economy, what that means for businesses, and what to keep an eye on in the coming months.

The economy grew at a healthy clip of 2.8% last year, and early indicators point to an economy that’s both strong and stable halfway through the first quarter of 2025. Since the economy is strong, the Federal Reserve doesn’t feel a lot of urgency to lower rates – meaning that interest rates are likely to stay higher for longer. Additionally, with the uncertainty around tariffs, small businesses should be preparing for multiple outcomes. We tackle all of that in this quarter’s The Economy Explained.

Talent market and labor

The average small business is experiencing a talent market that looks much more stable than in recent years. The unemployment rate dropped to 4.0% in January 2025, and there have been an average of 1.1 job openings per unemployed person in each month since July. This is primarily happening because businesses are adding fewer jobs, and people are unlikely to quit or be laid off from their jobs. Employees are staying put, and employers are keeping the employees that they have. As the average employee’s tenure with a company gets longer, they have a good sense of how the business operates. Your clients can take advantage of this opportunity by investing more time into business efficiencies and productivity.

With fewer job openings, competition for talent has decreased, leading to expectations of slower wage growth. Analysis from the Gusto Insights Group forecasts continued slowing in wage growth through 2025, which will likely be welcome news to many of your clients. However, a business’s labor expense turns into an employee’s income. This is income used to support consumer spending, which is vitally important to the economy. We’ll be keeping an eye on that as we go through this year.

Businesses in some industries are still experiencing hot labor markets. Healthcare, for instance, has about 2.5 open jobs per unemployed person. This means that while the average small business may be having an easier time filling open roles, not all businesses are. Labor availability may be very different depending on your clients’ industries.

Interest rates

The economy has made significant progress on taming inflation from its high of 9%, but getting inflation down to the Fed’s 2% target continues to be slow work. Due to the strong labor market, and inflation that is slightly above the Federal Reserve’s preferred rate of 2.0%, we expect that the Federal Reserve will be slow to lower interest rates this year. This means that the cost of credit may remain higher for longer than we anticipated when the Fed started lowering rates last September. 

To be clear, there’s a lot about the economy to be optimistic about in early 2025. The Federal Reserve’s confidence in slowing interest rate cuts comes from the overall strength of the economy. There remains uncertainty, but we’re generally in a pretty good place. Your clients should continue to evaluate their credit needs and think through the implications of getting credit now versus waiting based on the specifics of their business.

Tariffs

Tariff uncertainty will dominate policy conversations, and, if realized, tariffs can have a large effect on the economy. Tariffs are taxes that the government places on imported goods. When these taxes go up, it can increase the cost of bringing products into the country. However, there are steps that your clients can take now to help manage that uncertainty.

1. Encourage your clients to proactively talk with their customers.
   Your clients may be able to ask their suppliers and vendors if alternative products that aren’t affected by tariffs are available. These could be products produced domestically or in countries that aren’t affected by current tariffs. Some vendors may also be willing to offer flexible payment or offer certain discounts (e.g. if your clients buy in bulk).
2. Prepare your clients to review their pricing strategy
   If your clients’ expenses rise, they may have to raise the prices they charge their customers. Starting that conversation with them can help them communicate with customers to maintain trust.
3. Help your clients understand their current cash flows and how they can respond to increased expenses
   You have a unique view of your clients’ cash flow, their financial needs, and a strong understanding of their businesses. All of this is necessary for helping them think through the potential impact of increased tariffs. You can help them understand if their current cash reserves can handle increased expenses, or if they should seek out open lines of credit to handle any expense changes.
4. Keep up with policy changes
   These policies have changed quickly, and may continue to do so. You can help your clients keep up with these changes through having an understanding of when proposed tariffs may go into effect and what tariffs are currently in place. The Federal Government publishes the Harmonized Tariff Schedule to record all information in one place. And Gusto has prepared a fact sheet to help small businesses navigate this period.

Conclusion

As we finish out the first quarter of 2025 and turn toward the second, there are three key takeaways for accountants and small businesses:

• While the labor market is stabilizing, your clients should remain adaptable to industry-specific challenges and leverage employee tenure for increased productivity.
• Interest rates may stay higher for longer; help your clients evaluate their credit needs before making borrowing decisions.
• Tariff policies remain uncertain; stay informed, help your clients understand their exposure, and help them prepare strategies to adapt and manage potential cost increases.

That’s the Economy Explained With Gusto for February 2025.

Disclaimer: This is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.