Is the US economy about to hit a speed bump?

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

So, with the US election result out of the way, what lies ahead for the economy in 2025?  

What a difference a year makes. It appears set to grow by 2.7%, in real terms, in 2024, outperforming other developed markets. The consensus among economists in November 2023 was gloomier, at just 1%.  

For all the factors buffeting sentiment, and the uncertainty over whether there would be a ‘soft landing’ or ‘hard’ one, the US remains in rude health. That said, the recent drivers of expansion, government and consumer spending, will probably slow, though investment expenditure could pick up.  

Growth is forecast to ease to slightly above 2% in 2025. US consumer spending is a powerful force that helps to drive economic performance. However, they are running out of steam, especially among those with the least income, as reflected in a depleted savings rate (at 4.8%), after the pandemic-related sugar rush. In addition, inflation-adjusted income growth will probably slow.  

Tariffs: actions not words 

The next year could be another extremely uncertain one. Not least following the change in US leadership. Trump is likely to focus on implanting policies he can implement initially, and if the election campaign is a guide, these will mostly relate to tariffs. 

If his promises turn to actions, much higher import duties could be on the way in 2025. Their impact would depend on how wide-ranging they are and any counter measures from other countries.  

However, any inflation shock should be short-lived. Similarly, just like companies and consumers adjusted to the trade tariffs imposed in Trump’s first administration, the US economy should “move on” within a few quarters of any fresh ones being actioned. 

Potential unwind of policies 

The future of existing US stimulus packages, such as the Inflation Reduction Act, under a Republican leadership is another potential source of uncertainty. Most of the committed capital for this package still needs to be allocated. Of that, perhaps around a quarter of it might be at the mercy of a policy unwind by the new administration, according to some estimates.  

This might seem like being a significant amount, at a business level. However, in the context of net domestic investments (close to $1.5 trillion¹) it is small. That said, this potential lost investment could still hit US economic outlook. 

Interest rates 

The US Federal Reserve (Fed) has been in rate-cutting mode in 2024. The pace of further cuts in 2025 is likely to be dictated by the economic data alone, in setting policy. Any increase in uncertainty around the country’s trade relationships with others might boost activity, at least initially, to try and beat the imposition of costlier tariffs. However, this would simply front-load activity, and so could hit US growth from late 2025.  

Turning to employment, in the wake of the US election result, businesses might delay planned hiring sprees until more is known about the new administration’s plans. This could put more downward pressure on a relatively healthy jobs market, after recent signs of falling demand for workers.  

One anticipated policy change, a tougher stance on immigration, could limit the size of the jobs market, and so ‘artificially’ support employment, and wages. That said, overall, the Fed seems likely to keep cutting rates in 2025, at least initially. 

Stay open-minded 

The potential economic consequences, at home and abroad, of Trump’s election triumph are far-ranging and varied. During times of high uncertainty, staying open-minded can help investors to position a diversified portfolio appropriately for a series of possible scenarios.  

The most likely outcomes of an election result (as reflected in the hopes of some, that the president-elect’s win might mean that US oil stocks outperform) may not happen. With so many economists and investors seemingly sure that inflation will rise in coming months, perhaps, instead, it will fall faster than expected in 2025. 

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