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.
The dynamics of the US hard labor market combined in 2024. Nonfarm payroll expansion slowed in 2024, while the unemployment rate increased until 2023. However, the current state of the hard labor market It is more positive than those two data indicate.
Although net payroll growth slowed in 2024, it has not contracted since December 2020. Furthermore, despite the increase in the unemployment rate in 2024, it remained low, at 4. 2%, in November 2024 .
Beyond payroll and the unemployment rate, weekly jobless claims for December 2024 have been very low so far, and there were more than 7. 7 million open jobs in October 2024, which would have been a record before 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 summary, the U. S. homework market is a major factor in the market. The U. S. will remain on a solid footing by 2025.
With a strong hard labor market and emerging wages, entry into the United States has been strong. It is also very likely to remain positive in 2025. Recent spending data has been positive, while customer credit data shows that customers and families are doing well.
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 it also bodes well for 2025.
The New York Federal Reserve’s third-quarter 2024 report on U. S. household debt and credit. The U. S. showed a record point of U. S. customer debt of $17. 94 trillion. However, the report also points to low defaults, which account for 3. 5% of total customer debt. Prior to the third quarter of 2020, 3. 5% of notable customer debt would have been the lowest level on record.
The overall debt-to-income ratio of U. S. consumers was at a low of 82% in the third quarter of 2024. Before the COVID-19 pandemic, it 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-plus 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.
The genuine expansion of US gross domestic product will most likely accelerate between 2024 and 2023, according to forecasts from the International Monetary Fund. Additionally, by 2024, the US GDP expansion rate is expected to record the fastest expansion rate of all complex economies for the second consecutive year, according to Prestige Economics.
Looking ahead to 2025, the outlook for US GDP remains positive and the rate of expansion is poised to slow.
Recent data on US expansion supports a positive outlook, as real GDP accelerated in the third quarter of 2024 to an upwardly revised rate of 3. 1%, following a strong expansion rate of 3. 0%. in the second quarter of 2024. In the short term, the outlook is positive and the most recent GDPNow report from Atlanta Fed data indicates that Q4 2024 GDP is expected to be 3. 1%, according to the Data available through December 20.
About 69% of GDP in the third quarter of 2024 was spent on consumption. That’s why record nonfarm payrolls, high numbers of open jobs and low customer delinquencies supported the expansion in 2024, and bode well for the U. S. expansion prospects in 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 customer inflation rates are well above the Federal Reserve’s 2% target: the headline customer value index is at 2. 7%, the underlying CPI is at 3. 3%, the headline PCE inflation at 2. 4% and core PCE at 2. 8%. However, according to Prestige Economics, year-over-year customer inflation rates are expected to decline in the second quarter of 2025 due to base effects. Additionally, the annual average velocity of maximum customer inflation measures will likely be lower in 2025 than in 2024.
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 Federal Reserve’s interest rate cut in December and the FOMC’s projections, market expectations reflect any interest rate cut in January. However, the FOMC projections still reflect two interest rate cuts likely of 0. 25% in 2025.
The FOMC’s projections differ particularly from reality, and the Federal Reserve would likely have an explanation for why to cut interest rates by more than 0. 5% in 2025.
Financial professionals like to say, “the trend is your friend,” even if a trend is not very positive. Fortunately, in 2024, the trends have been generally positive, coupled with a net increase in payrolls, stable consumption, positive growth, a slowdown in inflation and a drop in interest rates. The outlook for 2025 includes many of the same factors and tailwinds as were offered in early 2024.
Of course, there are problematic dangers to the outlook, compounded by political and geopolitical dangers. However, those dangers also weighed heavily on the outlook for 2024, which is expected to close out a year for the economy and stock markets.
Continued strength in the hard labor market deserves to be absorbed and expanded in 2025, while an easing of interest rates would likely open the door to a further interest rate cut by the Federal Reserve.
Markets have priced in FOMC projections of just two Fed rate cuts of 0. 25% in 2025, and any further cuts would likely weigh on the dollar and bond yields, while supporting stock, bond, and commercial 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 the Federal Reserve through 2025?
Let me know what you think in the comments below.
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