One year ago, at the beginning of 2024, many economists discussed whether the US economy would experience a hard or a soft landing. However, almost no landing has occurred. The unemployment rate has ticked up a bit, and some other economic variables also indicate a slight cooling of the economy. However, overall, the US economy remains in good condition. But future development is marked by significant uncertainty, depending on President Trump’s economic policy decisions. Overall, his policy measures will be at least somewhat inflationary and growth-enhancing. It seems reasonable to expect GDP to grow by 2.2 percent in 2025. Inflation will only gradually decrease, and the unemployment rate will remain low.
Shortly before the new president’s inauguration, the US economy remains in good condition. Despite rapid interest rate hikes by the Federal Reserve to combat inflation, a recession has been avoided. The US economy again expanded surprisingly strongly in the third quarter of 2024 by 0.8 percent compared to the previous quarter (annualized 3.1 percent). Growth continued to be supported by private consumption, which increased even more strongly at 0.9 percent. Business investments also rose by 1.0 percent. After investments have grown exceptionally strongly against the backdrop of massive government support programs for semiconductor production and renewable energy, they will gradually stabilize at a high level. The recovery in residential construction investments that began in 2023 has not continued recently. The still-high interest rates likely dampened momentum. Foreign trade expanded strongly. However, exports grew less markedly than imports, and the trade deficit increased slightly.
Growth rates for the fourth quarter of 2024 will be published at the end of January. One can expect a continued solid expansion of the economy, but the economy might have lost some momentum. Our nowcast currently indicates a growth rate of 2.6 percent. Investment was probably weaker than in previous quarters (due to a decrease in aircraft investment and weak investment in computer equipment).
At the beginning of 2025, the US economy will continue to grow. Purchasing manager indices indicate a continued expansion for services and an improvement for manufacturing, although the manufacturing sector was not in expansionary territory (see figure). However, the growth rate will likely decrease. Private consumption should still support the economy. Retail sales have continued to increase moderately.
The labor market situation remains remarkably robust but has gradually deteriorated. The trend shows fewer new jobs being created (see figure), and the unemployment rate has slowly increased from 3.5 percent to 4.2 percent in November.
Future development is characterized by high uncertainty and depends significantly on economic policy decisions under the new President. It is assumed that there will only be isolated tariff increases initially, and the announced tariff rates of 20 percent on all imports and 60 percent on imports from China will remain threats. Corporate taxes are expected to be reduced from 21 to 15 percent during 2025, as announced, and regulations will be dismantled, possibly at the expense of environmental protection. Additionally, thousands or even several million people may be deported in 2025 if their immigration to the US is classified as illegal. However, we expect the number of people deported will be considerably lower.
These expected policy measures provide a slightly positive short-term impulse to economic dynamics. Simultaneously, federal budget deficits will rise significantly, and the measures assumed here will likely increase inflationary pressure. In November, inflation was still at 2.7 percent compared to the previous year. Core inflation, excluding energy and food prices, increased by 3.3 percent compared to November 2023. The price index for personal consumption expenditures increased by 2.4 percent in November compared with November 2023, and its core index was even 2.8 percent higher. The Federal Reserve has cut its key interest rates by a total of 100 basis points between September and December. In the first half of 2025, no further rate cuts are assumed due to persistently high core inflation and inflationary policy measures under the new president.
The US economy is expected to have grown by 2.8 percent in 2024. One can assume that the economic expansion will continue in 2025 and 2026. Growth rates could be slightly lower at 2.2 percent next year and 2.4 percent in 2026. Inflation will not fall to two percent until 2026. However, as mentioned above, uncertainty is very high.
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