What Will 2025 Bring? –Evening Brief – 11.27.24
The U.S. economy is projected to finish 2024 on solid ground, as indicated by median GDP estimates for the fourth quarter. This positive outlook, bolstered by strong consumer confidence and resilience in some key economic sectors, suggests a low likelihood of a near-term recession. However, the 2025 economic outlook could be significantly influenced by shifts in U.S. economic policy, contingent on various factors:
The Trump 2.0 economic agenda could produce a mixed bag of short-term growth benefits through tax cuts and deregulation but risks introducing inflationary pressures, labor market disruptions, and heightened global economic tensions.
Economists indicate that the overall combination is anticipated to be inflationary to some extent. Alan Blinder, a former vice-chairman of the Federal Reserve, predicts: “the new Trump policies might add 2% to 3% to total inflation over two to three years, a percentage point a year.”
Goldman Sachs economist Ronnie Walker wrote in a note this week that, “While the greatest downside risk to our inflation forecasts for 2025 appear cyclical, the greatest upside risks appear policy related.” He added that a 10% across-the-board tariff would lift core prices by about 1% and “further delay a return to the 2% target.”
Trump reaffirmed his intentions to impose tariffs on trading partners this week, stating that he will establish new import duties on three principal U.S. partners: China (up to 70%), Mexico (25%), and Canada (25%) upon assuming office.
Exploding U.S. government debt (now above $36 trillion) poses another significant challenge for the economy in 2025, particularly as discussions around extending the 2017 tax cuts gain momentum, which could put taxpayers on the hook for $4.6 trillion, according to a projection by the Congressional Budget Office. Both political parties have deprioritized debt reduction in recent years, contributing to an increasingly precarious fiscal outlook.
Regarding the assessment of fourth-quarter economic conditions, a notable divergence emerges in certain indicators. For example, the Chicago Fed National Activity Index for October revealed this week that U.S. economic activity dropped to -0.40 from -0.27 in September; its lowest level since April. Meanwhile, the Richmond Fed Manufacturing Index was unchanged at -14 in November, but below the -8.0 consensus.
Conversely, consumers are still showing few signs of bracing for recession. The Conference Board data showed that U.S. consumer confidence climbed to 111.7 in November from 109.6 in October, rising for a second straight month. Moreover, the Present Situation Index increased 4.8 points to 140.9, and the Expectation Index edged up 0.4 point to 92.3.
The mood on inflation was also positive, with average 12-month inflation expectations dropping to 4.9%, the lowest reading since March 2020, from 5.3% in October. The percentage of consumers expecting a recession in the next 12 months declined to the lowest since The Conference Board began asking the question in July 2022.
The 2.2% median GDP estimate for the fourth quarter of 2024 aligns well with the prevailing economic indicators, reflecting steady growth underpinned by robust consumer spending. However, forecasts for the first quarter of 2025 and beyond are becoming increasingly uncertain due to a confluence of factors that could introduce volatility into the economic landscape.