Five trends will impact the U.S. economy and financial markets in 2025, including jobs, consumption, growth, inflation, and interest rates. While 2024 was a solid year, there are reasons to be optimistic about the 2025 outlook.
Labor Market Trends And The Outlook For Jobs In 2025
There were mixed dynamics for the U.S. labor market in 2024. Nonfarm payroll gains slowed in 2024 while the unemployment rate increased compared to 2023. However, the current state of the labor market is more positive than these two data points indicate.
Even though net payroll gains slowed in 2024, they have not contracted since December 2020. Plus, despite unemployment rate increases during 2024, it remained relatively low at 4.2% in November 2024.
Beyond payrolls and the unemployment rate, weekly jobless claims for December 2024 have been very low so far, and there were over 7.7 million open jobs in October 2024, which would have been an all-time high prior to the COVID-19 pandemic.
While payrolls could slow further in 2025, multiple sizable contractions in monthly payrolls seem unlikely given the high number of job openings in the U.S. economy and other positive labor market data providing tailwinds for the year ahead.
In short, the U.S. labor market remains on solid footing heading into 2025.
Consumption Trends And The Outlook For 2025
With a solid labor market and rising wages, U.S. consumption has been solid. It is also likely to remain positive in 2025. Recent spending data have been positive, while consumer credit data show that consumers and households are in relatively good shape.
November 2024 retail sales were up 4.1% year on year, according to the U.S. Census Bureau. Plus, personal consumption expenditures were up 5.5% year on year in November 2024, according to the U.S. Bureau of Economic Analysis.
Solid spending from deleveraged consumers supported growth in 2024, and they also bode well for 2025.
The New York Fed report for Q3 2024 U.S. Household Debt and Credit showed a record level of U.S. consumer debt at $17.94 trillion. However, the report also reflected low debt delinquencies at only 3.5% of total consumer debt. Prior to Q3 2020, 3.5% of consumer debt delinquent would have been the all-time record low.
The aggregate U.S. consumer debt-to-income ratio was at a relatively low 82% in Q3 2024. Prior to the COVID-19 pandemic, this would have been the lowest debt-to-income ratio since 2002.
The U.S. is also in a particularly strong position for mortgage debt. Since Q1 2020, almost 68% of mortgage origination dollars have been issued to people with 760+ FICO scores—the highest bracket of credit scores.
The mortgage data is especially revealing, because it highlights that individuals with the highest credit quality in history borrowed at some of the lowest interest rates in history. Coupled with low debt delinquencies and a solid job market, the story of strong consumption seems poised to continue.
Growth Trends And The Outlook For 2025
U.S. real Gross Domestic Product growth likely accelerated in 2024 compared to 2023, according to forecasts from the International Monetary Fund. Plus, for 2024, the U.S. GDP growth rate is likely to post the fastest growth rate of any advanced economy for a second consecutive year, according to Prestige Economics.
Looking to 2025, the U.S. GDP outlook is still positive, although the growth rate is poised to slow.
Recent U.S. growth data support a positive outlook, since real GDP accelerated in Q3 2024 to an upwardly-revised 3.1%, which followed a strong 3.0% growth rate in Q2 2024. In the near term, the outlook is positive and the latest Atlanta Fed GDPNow data indicates that Q4 2024 GDP is likely to be 3.1%, based on data available through December 20.
Around 69% of Q3 2024 GDP was consumption, which is why record high non-farm payrolls, high numbers of open jobs, and low consumer debt delinquencies supported growth in 2024—and why they bode well for the U.S. growth outlook in 2025.
Consumer Inflation Trends And The Outlook For 2025
Year-on-year consumer inflation rates cooled in 2024 from 2023. Looking ahead to 2025, consumer inflationary pressures are likely to ease further based on modest month-on-month inflation in recent reports.
Current consumer inflation rates are well above the Fed’s 2% target, with the total Consumer Price Index at 2.7%, core CPI at 3.3%, total PCE inflation at 2.4%, and core PCE at 2.8%. However, according to Prestige Economics, year-on-year consumer inflation rates are likely to fall in Q2 2025 due to base effects. Plus, the average year-on-year pace of most measures of consumer inflation are likely to be lower in 2025 than in 2024.
Interest Rate Trends And The Outlook For 2025
Interest rates began falling in 2024 and more rate cuts are coming in 2025, according to the December Federal Open Market Committee projections.
Following the December Fed interest rate cut and FOMC projections, market expectations reflect no interest rate cut in January. However, FOMC projections still reflect two likely 0.25% interest rate cuts in 2025.
FOMC projections often differ greatly from reality—and there could be cause for the Fed to cut interest rates by more than 0.5% in 2025.
Market Implications Of The Outlooks That Will Shape 2025
Finance professionals are fond of saying, “the trend is your friend,” even if a trend is not very positive. Fortunately, in 2024, the trends were quite positive, including ongoing net payroll gains, solid consumption, positive growth, easing inflation, and falling interest rates. The outlook for 2025 includes many of the same elements and tailwinds that were present at the beginning of 2024.
Of course, there are downside risks to the outlook, especially political and geopolitical risks. However, these risks also loomed large over outlook for 2024, which is poised to close out a strong year for the economy and equity markets.
Ongoing labor market strength is likely to support consumption and growth in 2025, while easing interest rates likely open the door for the Fed to cut interest rates further.
Markets have priced in FOMC projections of only two 0.25% Fed rate cuts in 2025, and any additional cuts would likely weigh on the dollar and bond yields, while supporting equity prices, bond prices, and industrial commodity prices.
Despite the latest FOMC projections, Prestige Economics expects at least three rate cuts in 2025, with the next interest rate cut coming at or before the May 2025 Fed meeting.
What is your outlook for the economy, markets, and Fed policy 2025?
Let me know what you think in the comments below.
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