How U.S. Small Business Owners Can Prepare for Economic Decline

Is the U.S. Headed for a Recession?

As economic uncertainty looms, small business owners across the U.S. are bracing for potential challenges ahead. Recent reports indicate that slower consumer spending, tighter credit conditions, and persistent inflation are raising concerns about a possible recession or significant decline in the US economy. But what is a recession? What does it mean for small businesses? And how can business owners prepare for the economic uncertainty?

Characteristics of U.S. Recession

In the United States, only the panel of experts at the National Bureau of Economic Research is able to classify economic conditions as an actual “recession.” At its most basic level, a recession is marked by two, consecutive quarters of economic contraction or negative real gdp. Understandably, more is at play in making this kind of analysis and most economists believe there are four major recession indicators:

• Employment: Sometimes called “Nonfarm Employment,” this refers to the number of jobs held in the private sector and government agencies (excluding those in farms), private households, and the military.
• Industrial Production: This analysis measures the output of goods produced or mined in the United States. While the manufacturing sector actually makes up less than 20% of the US economy, its a highly sensitive indicator that is closely watched because it reacts quickly to changes in the business cycle.
• Real Retail Sales: Economists view consumer spending as a direct correlation to consumer sentiment. When consumers are wary about the economy, they tend to spend less. This decline in spending signals a slowdown in money supply and may indicate economic decline.
• Real Personal Income (excluding Transfer Receipts): This refers to household and personal income without accounting for benefits received for no direct services. For instance, that includes: Social Security, Medicare & Medicaid, Unemployment Assistance, and other benefits, mostly from government, but a few from businesses such as emergency stimulus monies as a result of the COVID-19 pandemic.

While the NBER is necessarily vague about the specific indicators that determine how they call a recession, they share a committee statement, which is the closest we get to identifying their method.

History of U.S. Recessions

Since the great depression, the US has weathered as many as 14 recessions. NBER maintains a chronology of US business cycles and identifies peaks and troughs of economic activity, including periods of both expansion and recession. In a nutshell, they define expansions as the periods between a trough and a peak, or the normal state of the economy; while recessions are the periods between a peak and a trough. Most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity may be an extended period. (The most recent peak occurred in February 2020. The most recent trough occurred in April 2020).

Because a recession must influence the u.s. economy broadly and not be confined to one sector, the NBER makes their decisions based on aggregate data. According to the committee, the two most important measures for recent economic cycles have been real personal income and employment.

Warning Signs of a Trump Recession

Understanding that NBER must classify a recession, economists and financial analysts are closely monitoring several key indicators that suggest economic slowdown in 2025:

• Declining Consumer Spending: The University of Michigan’s Survey of Consumers’ Index of Consumer Sentiment showed a 10.5% decline in consumer confidence this month. Household spending, which helps sustain consistent economic growth, are beginning to cut back on discretionary purchases creating ripple effects across industries from retail to hospitality. Economist Dennis Hoffman describes both consumer and business wariness, “All of this is a recipe for confidence erosion — when confidence erodes, consumers seize up, business owners seize up, and they don’t spend — they wait to see clarity.”
• Tighter Credit Markets: The Federal Reserve’s efforts to control inflation have led to higher interest rates, making it more expensive for businesses to borrow. Many lenders have also become more cautious, tightening their lending boxes and limiting access to capital. SBA changes have caused industry shifts for government-guaranteed lending and 7(a) products.
• Business Slowdowns: Hiring has slowed, and some companies are scaling back operations as demand softens. Government layoffs have impacted the private sector. These trends may continue to lead to more job losses.
• Trade and Tariffs: With major tariffs heading down the pike in April, 2025, most business owners are wary of what that means for their bottom line. Most recently Trump announced 25% tariffs on imported cars and car parts in an effort to encourage U.S.-based auto manufacturing. The problem, automative experts say, is that these tariffs will increase car costs by thousands of dollars, challenge a global supply chain, and disrupt small businesses in the auto industry.

The Impact on Small Business Owners

If a recession takes hold, small businesses—especially those reliant on consumer spending—will likely face the following challenges:

• Reduced Revenue: With customers spending less, businesses may struggle to maintain sales levels.
• Higher Operating Costs: Inflation-driven price increases on goods, materials, and wages could squeeze already thin profit margins. Tariffs also threaten to make costs higher on imported goods.
• Limited Access to Capital: With banks tightening their lending standards, securing loans or lines of credit may become more challenging.

How Small Businesses Can Prepare

While economic downturns pose challenges, proactive planning can help small business owners navigate uncertainty. Here’s how:

1. Strengthen Cash Flow Management: Review and reduce unnecessary expenses, build up cash reserves, and diversify revenue streams. For example,
2. Optimize Financing Options: Explore alternative funding sources, such as SBA loans or fintech lending platforms, before credit conditions tighten further.
3. Focus on Customer Retention: Prioritize exceptional service, loyalty programs, and personalized marketing to maintain a strong customer base.
4. Evaluate Supply Chains: Identify potential vulnerabilities and secure reliable suppliers to mitigate cost fluctuations. Open lines of communication with your suppliers may help to negotiate better terms or prices and cost-cutting measures.
5. Optimize Operations: Look for ways to streamline operations and improve efficiency. Aim to automate repetitive tasks through technology to save time and reduce long-term costs.
6. Negotiate with Suppliers: Open lines of communication with suppliers to negotiate better terms or prices. Building strong relationships with suppliers can result in favorable deals that help reduce costs during lean times.
7. Prequalify for Loans: Prequalifying for loans before you actually need them can give you peace of mind knowing funds are readily accessible if necessary. Loan Mantra pairs prequalified borrowers with lenders according to their credit box, making it easier and faster to secure financing if and when needed...even during a recession.
8. Inventory Management: Efficient inventory management ensures you’re not tying up capital when you need it most.

Looking Ahead

While the future remains uncertain, small businesses that take proactive steps can strengthen their resilience against economic downturns. Keeping an eye on market trends, managing finances strategically, and maintaining strong customer relationships will be key to weathering potential challenges.

Would you like to discuss financing options to help secure your business during uncertain times? Loan Mantra is here to help. Contact us today to learn more.