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.
There were mixed dynamics for the US hard labor market in 2024. Nonfarm payroll increases slowed in 2024, while the unemployment rate increased through 2023. However, the current state of the hard labor market is more positive than those two questions of knowledge 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 short, the US hard labor market will remain strong in 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 it also bodes well for 2025.
The New York Fed’s Q3 2024 report for 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 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. As of the first quarter of 2020, about 68% of the loan origination budget went to others with over 760 FICO scores, the credit score range.
The mortgage knowledge is particularly revealing because it highlights that Americans with the quality of credit in Hitale have borrowed at some of the lowest interest rates in Hitale. Combined with low delinquencies and a strong job market, the strong admissions story looks set to continue.
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 to 2025, the U.S. GDP outlook is still positive, although the growth rate is poised to slow.
Recent data on the U. S. 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 data from the Atlanta Fed’s GDPNow indicate that GDP in the fourth quarter of 2024 is expected to be 3. 1%, according to data available through December. 20.
About 69% of GDP in the third quarter of 2024 was made up of consumption. That’s why record nonfarm wages, higher job vacancies, and low customer debt default rates have supported the expansion in 2024, and bode well for the U. S. expansion prospects. United in 2025.
Year-over-year consumer inflation rates slowed in 2024 compared to 2023. Looking ahead to 2025, consumer inflation pressures are expected to decline further due to the modest monthly inflation reported in recent reports.
Current customer inflation rates are well above the Fed’s 2% target: the headline customer value index stands at 2. 7%, core CPI at 3. 3%, headline PCE inflation at 2. 4%, and core PCE at 2. 8%. However, according to Prestige Economics, customers’ year-over-year inflation rates are expected to decline in the second quarter of 2025 due to base effects. In addition, the annual average speed of maximum customer inflation measures is at its peak will likely be lower in 2025 than it is in 2024.
Interest rates began to fall in 2024 and additional cuts are expected in 2025, according to the Federal Open Market Committee’s December projections.
Following the Fed’s December interest rate cut and FOMC projections, market expectations do not 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.
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 problematic dangers to the outlook, compounded by political and geopolitical dangers. However, those dangers also weigh heavily on the outlook for 2024, which is expected to close out a 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 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 FOMC’s most recent projections, Prestige Economics expects at least three rate cuts in 2025, with the next 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 make in the comments below.
Also, be sure to subscribe to my YouTube channel and to Prestige Economics and The Futurist Institute for more content on the economic outlook, trends, money markets, inflation, employment, and Federal Reserve policy.
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