By Ben Casselman
As 2024 draws to a close, the U.S. economy is arguably experiencing its most stable state since the onset of the COVID-19 pandemic after five years marked by uncertainty and upheaval.
Inflation has moderated. Unemployment remains low. The Federal Reserve is reducing interest rates. The recession many analysts predicted as unavoidable has not occurred.
However, the economic prospects for 2025 remain highly unclear, primarily due to one significant factor: President-elect Donald Trump.
Throughout his campaign and in the time following his election, Trump has put forth extensive policy changes that may have deep and intricate effects on the economy.
He has suggested implementing substantial new tariffs and deporting potentially millions of undocumented immigrants, which could drive prices higher and slow down growth, as per most economic analyses. Simultaneously, he has advocated for tax cuts for individuals and companies that could stimulate quicker economic activity but might also result in larger deficits.
Moreover, he has committed to reducing regulations, which could enhance corporate profits and possibly boost overall productivity. Nevertheless, critics caution that such shifts could lead to increased worker injuries, environmental degradation, and greater vulnerability of the financial system to crises in the long term.
No one can predict with certainty which policies Trump will enact, the sequence in which they will occur, or the extent to which he can advance his agenda through Congress and the judiciary. Consequently, forecasts for the economy in 2025 and beyond remain uncertain.
“The outlook is highly uncertain, and much of that uncertainty stems from potential policy changes,” noted Michael Gapen, chief U.S. economist for Morgan Stanley.
Certainly, many Americans would argue that the economy isn’t doing well. Dissatisfaction with soaring prices, particularly for staples such as food and housing, has contributed to the decision of many voters to bring Trump back into office. However, consumer confidence had begun to recover even prior to the election and has continued to rise, indicating that the public, too, felt the economy was on the mend.
Formally, Gapen and his colleagues forecast that U.S. gross domestic product, adjusted for inflation, will increase by slightly more than 2% next year, aligning with predictions from other Wall Street analysts. This would suggest a modest deceleration from the over 2.5% growth rate of this year, according to most assessments, and is consistent with the recent cooling following a period of frenetic post-pandemic expansion.
Nonetheless, Gapen does not place great confidence in his forecast for the year.
“There are a wide variety of possible outcomes, and having a baseline outlook is not as beneficial as it would be in typical circumstances,” he remarked.
Stocks have surged since the election, indicating that many investors envision a more favorable scenario, anticipating larger profits and accelerated growth. A number of them seem to bet that Trump will prioritize tax cuts and deregulation while adopting a moderate stance on trade and immigration matters. Investors especially welcomed his choice of Wall Street executives for key posts — notably Scott Bessent, a hedge fund manager, as Treasury secretary — believing they will steer Trump away from the most intense aspects of his proposed tariffs.
However, this could prove to be a precarious wager. Concerning immigration policies, Trump has made appointments of senior officials — including Thomas Homan, his “border czar,” and Stephen Miller, his deputy chief of staff — indicating a strategy focused on strict enforcement. Despite Bessent’s appointment, Trump has continued to discuss his tariff intentions post-election. Last month, he declared via social media his plan to impose a 25% tariff on imports from Canada and Mexico unless those countries curb drug and migrant influx into the United States.
“The markets exhibit an unwarranted calm regarding trade and immigration policy,” asserted Michael Strain, an economist at the American Enterprise Institute, a conservative think tank. “Trade and immigration policies could potentially be highly disruptive to the economy.”
Strain presented a dire scenario for the economy, where new steep tariffs could suppress investment, mass deportations could hinder employers’ ability to find workers, and escalating deficits could raise borrowing costs. Such an outcome would leave Americans facing both increasing prices and diminished growth — a variant of “stagflation” not witnessed in the U.S. economy for nearly fifty years.
“In this situation, the costs of imported goods, groceries, dining out, and housing would all soar significantly,” Strain stated.
The implication of this is that both consumers and policymakers may be less accepting of rising prices than they were during Trump’s initial term. The Fed reduced interest rates for the third consecutive meeting on Wednesday, yet many economists believe the central bank will hesitate to lower rates further until the effects of Trump’s actions become clearer. This could impose pressure on growth and potentially result in higher unemployment rates.
While fears of recession have dissipated this year, policymakers still face the fundamental challenge: finding ways to lower inflation without triggering significant job losses. Inflation diminished rapidly in 2023 but has shown more resistance in the current year. The unemployment rate stands at 4.2% in November, low but on the rise. It is taking longer for jobless individuals to secure employment — a sign that the job market might be weaker than it seems.
“The primary concern regarding the economy at this moment revolves around the labor market,” advised Aditya Bhave, senior economist at Bank of America.
Nonetheless, forecasters have frequently undervalued the resilience of the U.S. economy in recent years. Moreover, there are strong reasons for ongoing optimism. Households maintain relatively low debt levels in relation to their incomes, suggesting that consumer spending can persist. Productivity has experienced robust growth in recent years, and the advancement of artificial intelligence may sustain that momentum. The majority of investors regard the United States as a secure place for investment, especially when compared to other regions worldwide.
“At this time last year, many predicted that the economy would either be in recession or face a pronounced last-mile inflation issue at some point this year,” commented Blerina Uruci, chief U.S. economist at T. Rowe Price. “Concerns over recession are significantly less prevalent at this moment.”
