The economic lookout for 2025 is strong, but there’s still a lot that could go wrong
With a fair share of familiar obstacles and challenges ahead, 2025 will begin with a largely optimistic view for the U.S. economy. Elevated interest rates, potential weakening in the labor market and a likely volatile political climate on Capitol Hill are just some of the hurdles the nearly $30 trillion economy will face. But with consumers holding strong in the face of persistent inflation, corporate profits again expected to surge and the prospect for a more business-friendly environment in Washington, the mood on Wall Street is largely buoyant heading into the new year. “There’s a strong probability that this economy accelerates in the 2025 and continues to outperform,” said Joseph Brusuelas, chief economist at RSM. “This is the economy we want. It’s the economy we need.” In the scenario Brusuelas considers most likely, real gross domestic product will accelerate at a 2.5% rate in the year ahead, just a bit slower than the approximately 2.7% pace that seems likely for 2024. That’s a scenario to which he assigns about a 50% probability. In fact, the second most-likely case he sees is growth that runs above 3%. A recession, he estimates, carries only about a 15% likelihood. Those numbers are ahead of the Federal Reserve’s projection for 2.1% growth and the 2.2% estimate from the Survey of Professional Forecasters . Still, it is consistent with a generally positive outlook for both the economy and the stock market. Strength from familiar places The main drivers will be “strong household consumption, absolutely rock solid and fixed business investment,” Brusuelas said. “Moreover, I’m very optimistic around the productivity-enhancing investment in equipment, software and intellectual property that firms are making to prepare for the [artificial intelligence] revolution.” “There’s a real investment-driven story embedded inside the economy that portfolio managers really need to keep close track on,” he added. Much of the economic story lately has been related to President-elect Donald Trump’s agenda of lower taxes, less regulation and tax cuts — along with what is expected to be a strong round of government spending on things like energy exploration and AI. However, those initiatives are more likely to be a 2026 story, with a growing likelihood that Trump will face stiff resistance in Congress on spending in particular as he tries to push his program through. Rather, the near-term picture could be fueled more by the continued push from tech innovation and business investment, along with a resilient consumer. Equipment spending has been surging through 2024, posting respective gains of 9.8% and 10.8% in the second and third quarters, part of a surge around 4% in nonresidential investment, according to the Commerce Department’s Bureau of Economic Analysis . Consumer spending also has held up despite higher prices, with retail sales rising 3.8% for the full year through November, according to the Census Bureau. Corporate profits also are projected to see another big year. S & P 500 companies are forecast to see growth of 14.8%, or nearly double the previous 10-year average, according to FactSet. “In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates,” UBS said in its look at the year ahead. “We believe many of the key factors that have sustained US economic growth in recent years are likely to persist.” Stock market analysts in turn are expecting strong returns in 2025, with the consensus average around 6,678 for the S & P 500, implying a roughly 12% gain from current levels. .SPX YTD line S & P 500 in 2024 What’s in the way To be sure, a few key tenets of growth are on at least somewhat shaky ground. There are lingering concerns over the state of the labor market. While hiring has held mostly steady , it has cooled considerably. Layoffs also are low, but the level of long-term employment has been on a steady track higher, with those out of work for 27 weeks or more at its highest level in November since January 2022. “We don’t have an adequate explanation as of yet why that is,” Brusuelas said. “We’ve got this interesting intersection of technological disruption that’s probably bleeding over in the labor force, and we’re going to want to go slowly and methodically to try to really understand this in as close to real time as we can.” Among the other biggest threats are the interlocking factors of interest rates, inflation and Federal Reserve policy. Fed officials recent upped their forecast for inflation in 2025 to 2.5% and now do not expect to hit their 2% target until 2027. Nevertheless, in September, the Fed embarked on what looked like an aggressive round of interest rate cuts, taking the unusual step of lopping off a half percentage point from its key overnight borrowing rate. Though the central bank followed with additional quarter-point reductions in November and December, the road ahead looks less clear. Futures traders, in fact, are pricing in only one or two more cuts in 2025, which likely will keep borrowing costs elevated and put pressure on the trillions of corporate, personal and government debt in the U.S. There have been concerns about $2.14 trillion in corporate debt that is coming due next year. However, S & P Global in a recent report called the problem “manageable” as companies took advantage of favorable conditions this year to refinance, reducing the load by 11%, of which some 41% was speculative grade. Corporate debt issuance soared in 2024, totaling $1.9 trillion though November, a 29% increase from the same period a year ago, according to data from the Securities Industry and Financial Markets Association. Debt outstanding now totals $11.2 trillion, a 6.1% annual increase, with Goldman Sachs projecting $1.5 trillion in issuance in 2025. “What you are seeing, plain and simple, is growth,” John Sales, Goldman’s head of Investment Grade Syndicate in the Americas in the firm’s Global Banking & Markets division, said in an October report . “You’re seeing growth in the economy. You’re seeing growth in corporate America. You’re seeing growth of the balance sheet. And as companies grow, they issue debt to finance that growth.” There also are concerns about the Trump agenda even amid the expectations that his platform could be a key growth driver. One of the biggest concerns is tariffs, with worries that they could reignite inflation, even though it stayed low during Trump’s first run in office from 2017 to 2021. Markets have been volatile in recent weeks, with the S & P 500 moving marginally lower over the past month as investor sort out what to expect. Brusuelas, the RSM economist, echoed many of his colleagues in saying tariffs do not appear to pose an immediate threat, though they could in the long run. “Are we talking about a trade skirmish or trade war? If we’re talking about a trade skirmish like we had 2018, 2020, I’m not worried about an inflation spike. Prices will be higher for those goods that are tariffed,” he said. “If we have a true trade war, true tit-for-tat retaliation, then I would be worried.”
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