US Economy Powers Along, More Expansionary Fiscal Policy Likely

2025 Economic Growth and Interest Rate Outlook

Real GDP is expected to grow by 2.6% in 2025, and upward revisions to productivity and income growth imply a higher short-run potential growth rate. There is also a reduced risk of a sudden and significant increase in layoffs because of wider corporate profit margins than previously thought. The low hiring rate is still a point of concern, but we do not expect a pickup in permanent layoffs.

The latest employment data support the view that the labor market went through a lull rather than a systemic decline.

The Oxford Economics US Business Cycle shows the economy is on solid footing, although the federal budget deficit is still over 6% of GDP. Upward pressure on the deficit from higher interest expenses and spending commitments could force cuts in the future.

Given the result of the US presidential election, we still expect federal spending to get another boost from the extension of the 2017 tax cuts and targeted government spending. We expect consumer spending growth to average close to 3% in 2025 as real disposable incomes remain strong, supported by rising wages and slowing inflation.

Personal Consumption Expenditures inflation (PCE) ran a bit hotter in September but is still trending toward the Fed’s 2% goal. We expect cooling core inflation to be sustained next year as a looser labor market cools nominal wage growth and disinflation in rental inflation intensifies. In any case, the Fed’s policy-making decisions are more likely to be based on developments in labor market data. On this front, we anticipate another 25bps cut at its December meeting following the 25bps cut in November.

However, policies that President-elect Trump has touted—tax cuts and tariffs specifically—could boost inflation in the longer term. We now expect just three rate cuts next year (compared to four three months ago) and see the equilibrium interest rate settling in a range of 3.00%−3.25%.

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