Five trends will have an effect on the US economy and money markets in 2025, including employment, consumption, growth, inflation and interest rates. Although 2024 was a strong year, there are reasons to be positive about the outlook for 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.
Although net payroll gains slowed in 2024, they have 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 payrolls 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 an all-time high prior to the COVID-19 pandemic.
While payrolls could slow further in 2025, significant contractions in monthly payrolls seem unlikely given the increased number of job openings in the U. S. economy. U. S. and other positive hard-working market data that will provide favorable winds for next year.
In short, the US hard labor market will remain on solid footing in 2025.
With a strong job market and emerging wages, admission into the US has been strong. It is also 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 showed a record high point of U. S. customer debt of $17. 94 trillion. However, the report also highlighted low defaults, representing 3. 5% of total customer debt. Before the third quarter of 2020, 3. 5% of antisocial customer debt would have been an all-time low.
The overall debt-to-income ratio of American 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 United States is also in a particularly strong position when it comes to credit debt. Since the first quarter of 2020, about 68% of the loan origination budget has been awarded to Americans with more than 760 FICO scores, the credit score range.
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.
Genuine expansion of U. S. gross domestic product likely accelerated between 2024 and 2023, according to the International Monetary Fund’s forecast. Moreover, by 2024, the rate of expansion of the U. S. GDP is expected to show the fastest rate of expansion of any complex economy in the second year of the year. followed, 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-over-year consumer inflation rates slowed in 2024 compared to 2023. Looking ahead to 2025, consumer inflationary pressures are expected to ease further due to the modest monthly inflation reported 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 is likely to 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 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.
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, the outlook entails problematic dangers, to which are added political and geopolitical dangers. However, those dangers also weighed heavily on the outlook for 2024, which was expected to cap a strong year for the economy and stock 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 FOMC’s most recent projections, Prestige Economics expects at least three rate cuts in 2025, with the next interest rate cut coming no later than the May 2025 Federal Reserve 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.
Also, be sure to subscribe to my YouTube channel and visit Prestige Economics and The Futurist Institute for additional content about the economic outlook, trends, financial markets, inflation, jobs, and Fed policy.
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