There's a simple reason tariffs have made a US recession highly likely, according to Apollo Global Management's top economist.
That's because the impact on small businesses—a pillar of the US economy—is set to be high, Torsten Sløk said.
The import duties Trump has imposed on other nations could significantly impact growth, Sløk said in a note to clients over the weekend. Apollo estimates that the tariffs could shave as much as four percentage points from US GDP, basing its estimates on the hit to US growth when Trump first imposed tariffs on China in 2018.
"Tariffs have been implemented in a way that has not been effective, and there is now a 90% chance of what can be called a Voluntary Trade Reset Recession," Sløk wrote.
"Small businesses that have for decades relied on a stable US system will have to adjust immediately and do not have the working capital to pay tariffs. Expect ships to sit offshore, orders to be canceled, and well-run generational retailers to file for bankruptcy," Sløk said.
He pointed to several signs that a slowdown in small businesses could wind up being a major hit to the economy.
For one, small firms account for most of the employment in the US. As of January, businesses with fewer than 500 workers accounted for around 110 million jobs. That's about four times the employment accounted for by businesses with more than 500 employees, Apollo's analysis shows.
Small businesses also account for more investment than large-cap firms. US private fixed investment clocked in around $4.2 trillion in the first quarter of 2024, according to data from the Bureau of Economic Analysis. That compares to capital expenditures spending among S&P 500 companies, which hovered around $1 trillion that quarter, per Apollo's analysis.
Smaller companies have also accounted for a larger share of GDP in the past. In 2014, the most recent year data was available, small businesses accounted for $5.9 trillion in GDP, or 44% of the total share.
"The bottom line: if the current level of tariffs continues, a sharp slowdown in the US economy is coming," Sløk said.
Small businesses are already bracing for pain stemming from tariffs, given that most economists say tariffs could result in price increases for US consumers. In March, two-thirds of small businesses said they expected to be hurt by tariffs and other trade issues, according to one Vistage Worldwide survey conducted for the Wall Street Journal.
