The Economy Explained: Navigating a Cooling but Resilient Economy – August 2025

The Gusto Insights Group is here to make you smart on the economy so you can better support your clients, who we know are asking tough questions right now. 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.

Key Takeaways:

• Plan for a resilient but cooling economy. The U.S. economy in 2025 remains strong, with real GDP per capita growing steadily at roughly 1.7% annually for the past decade – enough to double the size of the economy every 40 years. However, the economy’s growth has slowed recently, and small businesses should plan for a more measured pace ahead.

• Inflation is tamed, but tariffs loom large. Headline inflation has fallen from a 9% peak in 2022 to around 2.7% in mid-2025, near the Fed’s 2% target. That takes the pressure off cost increases for many small businesses. But new tariffs (ranging from 10% to 50% on imports) will result in one-time cost shocks that will require some small businesses to re-think their supply chains.

• No end in sight for high business borrowing costs. Despite some easing by the Fed last year, interest rates and small business loan rates (often 7% to 15%) remain historically high today. The cheap capital of a decade ago is over, and small businesses today are doubling down on cash flow and self-financing over debt-driven expansion.

• Prepare to hire in a cooling labor market. Job gains in America have slowed from 2022 – 2023’s breakneck pace, and the number of unemployed workers per job openings is up – bringing much-needed relief to small businesses who struggled to hire in 2023. Growth in salary and benefits costs has moderated to pre-pandemic levels, although health insurance costs are still rising at around 5% per year. This “Great Rebalancing” of the job market offers more hiring flexibility to small businesses in 2025.

• Focus on managing cash and reigning in costs. With borrowing costs at 7-15% and economic uncertainty ahead – including slowing consumer spending and an ever-changing tariff landscape – businesses and their advisors should focus on cash-flow management, cost control, and flexible planning approaches.

Introduction

Small companies in America today are navigating a sea of economic uncertainty. 2025 has been a year of surprises for companies, including complex new tariffs, new federal tax rules, and continued high borrowing costs. And surveys from the Federal Reserve show ¾ of small businesses cite rising business costs as their main financial challenge today. 

However, beneath the headlines, the U.S. economy remains historically strong and resilient, with robust new business formation and steady economic growth. Today more than ever, companies are looking to their expert advisors to help them thread the needle in today’s economy, to make smart investments and hedge against upcoming risks.

In this article, I’ll walk through an economist’s view of what’s happening in the U.S. economy today, and break down what it means for small businesses and the accounting advisors helping guide them. Our goal is to demystify the economy’s current numbers, show you how it all fits together, and translate it into smart strategic moves by small businesses across America. 

The big picture

Taking the economy’s temperature

Beneath the headlines, the overall state of the U.S. economy is historically strong. US GDP today is a $30 trillion behemoth, or $88,600 per person per year – and real GDP is growing at a healthy 3% per year as of June. In inflation-adjusted terms, real GDP has risen about 1.7% annual for the past decade, which is enough to roughly double the size of America’s economy every 40 years. 

Aside from the 2-month economic blip during the pandemic lockdowns of 2020, the last major U.S. recession ended in June 2009 following the financial crisis. That means it has been over 16 years since a lengthy, major U.S. recession and fully 5 years since the Covid mini-recession. From this 30,000-foot view, the U.S. economy today is characterized by resilience, and slow but steady growth in recent years.

For small business owners, the below chart is a reminder that the fundamental economic engine of the U.S. remains robust, despite today’s economic and policy uncertainty.

Another view of the economy’s overall health is to look at job growth. In the figure below, we show the monthly job gains from the famous Employment Situation Report from the BLS that makes headlines each month. So far in 2025, the economy has added around 85,000 new jobs per month – enough to keep the nation’s unemployment rate at a historically low 4.2% as of July. 

However, the pace of job gains has slowed remarkably in mid-2025, with many employers dialing back hiring plans in response to uncertainty around tariffs and immigration crack-downs. In addition, some cracks in the nation’s labor market have emerged recently, such as rising long-term unemployment – the number of workers who’ve been laid off for 6+ months is up 18% from last year, and there’s growing evidence that unemployment for new college grads is on the rise as companies turn to AI rather than entry-level professional and tech hiring. 

From the view of small business owners, this recent moderation in the U.S. job market is welcome news. After the the frenzied pace of hiring of 2021 – 2023 that forced many companies into expensive bidding wars for talent, today’s measured pace of job growth is a return to sustainability – allowing for more rational hiring and giving time to properly evaluate candidates rather than scrambling to fill roles.

The revenue side

The key to managing any small business is a balancing act between two sides of a financial coin: Driving revenue growth, and keeping expenses under control. Both are partly determined by the sea of economic forces within which companies operate. 

Let’s first look at the revenue side for small businesses, and today’s economic factors impacting it. 

Consumer spending – the now

First let’s look at U.S. consumer spending. This is by far the biggest driver of the economy, making up about 70% of GDP, and is the best overall predictor of what’s possible for revenue growth at most small businesses. 

The latest numbers show U.S. consumer spending remaining strong and near pre-pandemic growth rates of around 5% annually. After the dramatic fall off in consumer spending during the early pandemic, consumer spending surged dramatically as travel resumed and businesses reopened for in-person dining and shopping. In 2025, consumer spending has moderated back to a roughly 5% annual growth rate – healthy by historical standards. However, consumer spending is showing a slight dip in June and July, suggesting that most small businesses should plan for somewhat weaker revenue growth in the remainder of 2025 compared to past years. 

Today’s roughly 5% growth rate in consumer spending represents a “Goldilocks” scenario in some ways – robust enough to support moderately growing business revenue but sustainable enough to avoid creating bubbles or unsustainable consumer debt loads. For small businesses, this suggests U.S. customers are still spending today, but have moved past the post-pandemic-era splurging phase into more deliberate and sustainable purchasing decisions – returning to an era of normal consumer demand. 

Consumer sentiment – the future

While U.S. consumer spending remains generally healthy, the future looks decidedly less rosy. Surveys of consumer optimism have been shown to be a key driver of future spending, and some of the most popular surveys show stark declines in consumer optimism in 2025. 

According to the widely watched survey from the University of Michigan, consumer sentiment fell sharply in early 2025 as the job market has slowed. U.S. consumer sentiment was down -11% from a year ago as of June. While that’s reason to be cautious about the pace of consumer spending later this year, there is some good news in the data. As shown in the figure below, after months of decline consumer sentiment ticked up in June, the first improvement in 2025. 

What it means for small business

• Focus on customer retention over acquisition. In today’s environment where consumers are likely to dial back spending in the remainder of the year, focusing on retention of existing customers is a more cost-effective strategy than finding new customers. Investing in customer service, loyalty programs, and relationship-building rather than cash-heavy marketing campaigns targeting new customers is a sensible strategy in late 2025.

• Prepare for more discerning consumers. As consumer sentiment remains fragile, customers are likely to become increasingly selective about major purchases. Ensure that your company’s value proposition is clear and consider exploring different price points to accommodate varying consumer tastes in coming months.

• Diversify revenue streams where possible. If your business is heavily dependent on discretionary consumer spending, consider exploring ways to add products and services that customers may view more as regular necessities. Doing so can provide a crucial buffer if consumer sentiment in fact translates into more cautious consumer spending in late 2025.

The cost side

Next let’s shift over to the cost side of the financial coin. What do recent economic indicators tell us about what’s coming for small business costs in late 2025?

Inflation is tamed – for now

One of the most harmful economic phenomena for small businesses is cost inflation. Small businesses typically survive on razor-thin profit margins, and most only keep enough cash on hand to cover roughly 15 days of expenses. As a result, America’s post-pandemic surge in inflation put extreme pressure on small businesses. 

At its worst in 2022, inflation was surging at an annual rate of 9% per year – a pace not seen since the days of “stagflation” in the 1970s. However, as shown in the figure below, the profit-eating beast of inflation has largely been tamed as of June 2025. Consumer inflation today is down to an annual pace of 2.7%, just above the Fed’s long-term target of 2%. 

Many economists view this return of U.S. inflation back to a more sustainable pace as the most important economic policy success of the past decade. The causes of the post-pandemic surge in inflation are well-known: Surging commodity prices, disruptions in supply chains, combined with a surge in federal spending that overheated the economy. But thanks to decisive action by the Fed, inflation today is rapidly returning to normal levels.

For small businesses, this dramatic return of normal inflation levels means the era of shocking across-the-board monthly price increases for business inputs is behind us (other than those impacted by tariffs – see “Tariffs” below). Businesses can today budget more confidently for modest ongoing cost increases without fearing surprise inflation that characterized 2022 and 2023.

While U.S. inflation is down overall, there’s a lot of diversity beneath the topline numbers. In the latest June report, energy costs were elevated with natural gas prices up 14.2% year-over-year, and electricity costs up 5.8% – two factors that disproportionately impact small businesses with physical locations. One silver lining is that gas prices are down about 8% from a year ago, providing some cost relief for delivery-dependent businesses.

Borrowing costs still painfully high

Business loans are the lifeblood for many small businesses. Although U.S. inflation has come down dramatically, interest rates have not – and that means rates for business loans remain elevated in 2025.

The table below shows typical rates for various business loans as of July 2025. Term loans today carry rates of 7.4% to 7.9%—more than double what they were just a few years ago. SBA loans, traditionally a small business lifeline, now range from a punishing 10.5% to 15.5% interest. Even lines of credit, typically the most affordable option, now cost business owners 6.5% to 7.9% on average. These rates illustrate a changed economic reality for small businesses today, and illustrate the importance of focusing on break-even cash flow and avoiding debt financing whenever possible.

The role of the Fed

It’s no secret why business borrowing costs remain high in 2025. When post-pandemic inflation surged, the Federal Reserve Board leaped into action, rapidly raising the economy’s benchmark interest rate dramatically in 2022 and 2023 from near zero to over 5%. Since then, Fed policymakers have been extremely cautious about returning interest rates to pre-pandemic levels. 

The figure below shows the dramatic tightening of monetary policy by the Fed in response to 2022 and 2023 inflation, along with the move to slightly reduce rates in 2024. Today, the Fed’s benchmark target rate sits at 4.5% – about double the rate before the pandemic. 

To many economists, this dramatic change in America’s interest rate landscape explains many patterns we see in today’s economy and labor market, from a push to flatten managerial roles to slowdowns in tech hiring. This represents a huge change in how today’s small businesses have to manage cash, and is an environment that strongly favors business models with strong cash generation over those dependent on external financing.

Although growth in overall wage and benefits costs has slowed this year, employer costs for health insurance are still rising at a pace of around 5% per year. That’s down from the breakneck 6.7% health insurance cost growth of mid-2024, but well above the pre-pandemic growth rates of 2-3% per year. So small businesses should expect some continued pain in the form of rising health insurance costs for the remainder of 2025.

Overall, this return of labor costs growth to a more sustainable level represents a massive relief for America’s small business owners, who have struggled to keep up with wage and benefit costs escalation in recent years. Going forward, businesses should plan for rising payroll and benefits costs on par with inflation, or around 3.5-4% annually. Across all U.S. employers, the latest breakdown for employee costs are as follows: 

• Total costs employee costs: $47.92 per hour. 

• Wages and salaries: $32.92 per hour. 

• Total benefits costs: $15.00 per hour.

The Benefit of Offering Benefits

Data from Gusto show that two-thirds of small businesses offer benefits, with paid time off leading in adoption, followed by 401(k) retirement plans and health insurance. But company size matters. More than two-thirds of employers with more than 10 employees offer health insurance, while only 25% of businesses with 1-5 employees do so. That suggests there’s a strategic inflection point for growing businesses where offering health insurance makes sense: Data show that SMBs that do offer health plans to employees are 13% more likely to say they didn’t have issues finding employees when hiring, and are 25% more likely to report their hired employees exceed expectations.

Return of labor market slack?

During the post-pandemic years, hiring surged and the labor market facing small businesses made it extremely hard to fill open roles. That in turn helped fuel surging wage growth and rising payroll costs for small businesses. What do we see in terms of labor market slack today? 

The best view of how easy or hard it is to fill open jobs today comes from the BLS JOLTS survey. It shows the number of job openings across the U.S. economy, compared to the number of workers currently looking for jobs. The latest data show that slack in the labor market remains low today, but it’s slowly rising. 

In the figure below, we show the ratio of unemployed Americans looking for jobs to the total number of unfilled jobs across the economy. At this broad view, there are about 1.0 unemployed workers per open job today – far below the 6+ workers competing for each job we saw during the 2009-10 recession, but well above the shockingly low 0.5 level during the red-hot hiring days of 2022 and 2023.

This return to a ratio of about 1.0 unemployed workers per job opening represents a huge relief for the hiring plans of many small businesses, which struggled to hire in 2023 when there were literally twice as many open jobs as available workers nationally. That imbalance forced many U.S. businesses into desperate bidding wars for talent. This rising ratio in 2025 means small businesses can be more selective and measured in their hiring decisions later this year.

The tariff wildcard

Small business owners have been on a wild ride of U.S. tariff policy in 2025, with rules changing daily in some cases. In June alone the Trump administration changed tariff rates for dozens of countries, ranging from roughly 10% to 50% import tariffs aimed at going into effect in August. That includes an additional 40% penalty for products that attempt to skirt rising tariffs by being “transshipped” through intermediate countries with lower rates.

As of July, the latest estimate of the overall impact of tariffs on U.S. consumers is that they’ll experience an average effective tariff rate of about 18%. That’s the highest since 1934, although well below rates that prevailed in the 19th century when the U.S. was far more reliant on tariffs for federal revenues.

To economists, tariffs are simply an excise tax and the impact on businesses will be similar. Businesses who are heavily exposed to tariffs through their supply chains should brace for 1-time cost increases – not sustained price increases as with general inflation – and those costs will not likely show up in ongoing official inflation figures. However, as with any tax increase they will require major small business adjustments. 

What can companies do to brace for the coming impact of additional tariffs in 2025? Some strategies we suggest include:

• Rethinking your supply chain: If your business relies on inputs from the affected countries, it’s worth exploring whether other options exist. Are there other domestic or international suppliers with more favorable tariff rates you can rely on?

• Renegotiate supplier contracts: If getting the business inputs you need domestically (or from an unaffected country) simply isn’t possible, an alternative strategy is to negotiate prices with your suppliers. In many cases, they may be willing and able to absorb some of the tariff cost increases or offer different terms that soften the blow.

• Pay attention to inventory: It may take months for your existing inventory to sell out. With changing tariff rates, now is the time to understand what you’ve got on hand, and when you’ll need to place additional orders. Plan accordingly and be sure you’ve budgeted for the impact of any new tariffs to avoid surprise costs when placing future orders.

• Reign in other costs: With tariffs potentially leading to a permanent step-up in materials costs, now is the time to review your entire operation for streamlining opportunities to free up cash. It may be possible to delay certain business costs or find other savings elsewhere in your budget to help offset tariff impacts.

• Stay flexible: One lesson of 2025 is that U.S. tariff policies can change overnight, and new trade agreements are likely to alter the tariff landscape in the coming year. Do whatever you can to build flexibility into your spending plan, rather than making hard-to-reverse business commitments based on current tariff policies.

Summing it up: What does today’s economy mean for small business? 

Looking over the broad sweep of U.S. economic indicators, there are several practical lessons that small business owners can take away from the numbers as of August 2025. 

• Plan for 3.5% – 4% annual increases in total compensation costs. The dramatic wage increases of 2022-2023 are behind us. Nationally, payroll and benefits costs are growing around 4% annually, similar to pre-pandemic levels. Prepare to budget for more moderate, predictable payroll costs growth in late 2025.

• Prioritize cash flow management: With borrowing costs at 7-15% and economic uncertainty ahead, focus on break-even cash flow and avoid debt financing whenever possible. Small businesses with strong cash positions will be better able to weather sudden disruptions and changing federal tax and tariff policies.

• Use benefits strategically as a competitive advantage. The data shows well-designed benefit packages improve both hiring success rates and employee performance. Think of benefits as productivity investments rather than just costs to minimize, especially for companies growing beyond the 10-employee threshold where health insurance becomes more common and impactful.

• Take advantage of a rebalanced labor market. With the job market normalizing, this is an excellent time to be more selective about talent and focus on finding employees who are truly good fits for your culture and needs, rather than filling positions quickly out of desperation. The return to roughly 1.0 unemployed worker per job opening means you can be more selective in hiring and avoid bidding wars for talent.

• Shift to customer retention strategies: As U.S. consumer sentiment weakens, spending may moderate. Be prepared to invest in customer service and loyalty programs rather than expensive new customer acquisition. And prepare for more selective consumers by ensuring your value proposition is clear, and consider offering different price points to discerning buyers.

• Conduct a tariff impact assessment: Review your supply chain for exposure to the new ~18% average tariff rates and explore alternative suppliers or contract renegotiations where needed. Build as much flexibility into business plans as possible – with rapidly changing tariff policies and economic uncertainty, avoid hard-to-reverse commitments and maintain agility in your spending plans.

That’s your August 2025 edition of The Economy Explained with Gusto! For more insights about today’s economy, visit our website at: gusto.com/resources/gusto-insights.