By Keith Writz, Chief Investment Officer at Union Savings Bank
Now that the new year has begun, it’s clear that the U.S. economy exceeded expectations in 2024, marking another year of resilience amidst challenges. Early forecasts had hinted at a slowdown, but the reality was quite different, with the economy continuing its expansion, inflation moderating, and the stock market delivering strong returns. In this blog, I’ll reflect on key economic developments in 2024 and offer my top 10 predictions for 2025.
2024: A Year of Resilience and Unexpected Strength
At this time last year, many experts were predicting the U.S. economy to grow at a modest pace during the year. Moreover, the possibility of a recession loomed large, with Wall Street forecasting a 65-70% chance of a downturn in 2024. Fortunately, the economy defied these low expectations by growing more than 2.50% in real terms. The economy was buoyed by consumer spending, strong labor markets, and a continued push toward technological advancements, particularly in artificial intelligence (AI).
I can point to two other key macro factors. Inflation, which had been a major concern in previous years, showed signs of moderation. By the end of 2024, inflation was expected to finish around 3%, reflecting meaningful progress toward price stability. The labor market, though slightly softer in the first half of the year, remained strong over the full year, exceeding expectations of both the markets and the Federal Reserve. As the year ended, the U.S. unemployment rate stood at 4.1%, a level that is considered low by historic standards.
The U.S. capital markets also impressed, with the stock market delivering a stunning 28-29% return in 2023 and a cumulative 65% return over the past two years. While the sharp volatility in interest rates persisted, this strong market performance by equities created significant wealth for investors and outpaced even the most optimistic projections.
As we look ahead to 2025, it’s important to understand the key forces shaping the economy. Can this growth continue? How will inflation and interest rates evolve? And what role will policy changes play in the years to come? Below, I outline my top 10 predictions for 2025.
Top 10 Economic Predictions for 2025
1. Tax Reform Legislation
The new incoming administration will prioritize tax reform, aiming to preserve key aspects of the 2017 Jobs Act. Expect discussions around retaining tax brackets, removing SALT deduction caps, and maintaining the corporate tax rate at 21%. Without timely legislative action, many of these provisions will expire by 2026, potentially leading to significant tax increases.
2. Tariffs as a Strategic Negotiation Tool
In 2025, tariffs will continue to serve as a focal point of U.S. trade policy. While China remains a primary target, we can expect targeted tariffs to be leveraged in negotiations with Canada and Mexico on issues like border security and fentanyl trafficking. This more focused, issue-specific approach will replace broad-based tariff increases.
3. Continued Economic Expansion
The U.S. economy is projected to maintain a solid 3% real GDP growth rate in 2025, driven by deregulation, technological advances, particularly in AI, and resilient consumer spending. The likelihood of a recession in the near future remains low as these positive economic forces sustain growth.
4. Moderate Inflation
While inflation is expected to remain under control, we foresee it stabilizing at around 3% as the economy continues to grow. Although inflationary pressures will moderate compared to previous years, sustained consumer spending and strong economic activity will prevent any drastic decline in price growth.
5. Gradual Federal Reserve Easing
The Federal Reserve will continue its cautious approach to interest rate policy, slowly reducing the Federal Funds Rate toward 3.5% by the end of 2025. The pace of these reductions will be data-driven, with policymakers looking for signs that inflation is under control and economic growth is stable.
6. Yield Curve Shifts
As the Federal Reserve cuts interest rates, we expect short-term Treasury yields to drop to the 3% range, while intermediate and long-term yields will stabilize below 5%. The yield curve will shift to a positive slope, reflecting optimism about strong future economic performance and providing investors with greater confidence.
7. U.S. Stock Market Strength
The S&P 500 is forecasted to reach new highs in 2025, with strong contributions from mid-cap and small-cap stocks as investors diversify portfolios. Corporate earnings growth is projected to be 10-15%, although equity returns may be somewhat more modest than the explosive growth seen in previous years.
8. Continued U.S. Economic Dominance
The U.S. economy will remain a global leader, maintaining a dominant 73% weight in the Morgan Stanley World Equity Index. Advancements in AI, ongoing deregulation, and strong corporate profits will continue to support a strong domestic market, ensuring U.S. outperformance relative to global peers.
9. Geopolitical and Immigration Developments
Expect heightened focus on border policies and immigration reform as political discourse in the U.S. heats up in 2025. On the global stage, U.S. diplomatic efforts to mediate conflicts in Europe and the Middle East could lead to key resolutions, reinforcing the U.S.’s central role in global affairs.
10. Baseball’s Cultural Impact
Amid economic and political uncertainty, expect Major League Baseball to capture the public’s attention, offering a cultural escape. With heightened interest around teams like the New York Mets, baseball will bring a sense of positive distraction, uniting communities during a time of change.
Conclusion
Looking ahead, 2025 promises to be another dynamic year for the U.S. economy, marked by a continued push toward growth and stability. While the challenges of inflation, interest rates, and geopolitical issues persist, there’s reason for optimism. The continued strength of the U.S. economy, the gradual easing of interest rates, and a vibrant stock market supported by strong company fundamentals, all suggest that we are on a path toward long-term prosperity.
As always, investors should remain vigilant and stay informed, ready to adjust their strategies in response to evolving market conditions. With careful attention to economic indicators and a focus on long-term growth, 2025 can be another year of success.
For more insights into the upcoming year, watch our free webinar with Keith recorded in December 2024: The Road to 2025: What’s on the Other Side of Change? Passcode: Wealth@2025
Keith and our team of financial advisors bring worldly expertise, local knowledge, and service to the table for every discussion. Call us today and set yourself, your business, and your employees up for success in 2025 and beyond – 866.872.1866 or visit The Wealth Group website.