US economic outlook December 2024

US exceptionalism: a global growth leader and disruptor in 2025
 

• Outlook: The US economy remains on a solid growth trajectory supported by healthy employment and income growth, robust consumer spending and strong productivity momentum that is helping tame inflationary pressures. We expect these positive dynamics will carry into 2025, allowing the Fed to pursue gradual, but cautious, policy recalibration.
  
  
• Still, the outlook is clouded by unusually high uncertainty surrounding regulatory, immigration, trade and tax policy. We anticipate the economy will benefit from stronger private sector confidence and deregulation in the first half of 2025, but lower immigration and tariffs will represent inflationary growth headwinds in the second half of the year. The administration will likely push for various household and corporate tax cuts in 2025, while the extensions of the Tax Cuts and Jobs Act should prevent a severe fiscal tightening in 2026. In this context, we foresee real GDP growth decelerating modestly from 2.7% in 2024 to 2.1% in 2025 and 1.7% in 2026 — when tariffs pose a greater drag on the economy.
  
  
• Gently cooling labor demand: The November employment report showed a broad-based but temporary rebound in payroll gains of 227k as disruptions from strikes and hurricanes faded. Still, weaker household survey data confirmed labor market conditions are cooling, with the unemployment rate rising to 4.25%. And slower labor supply dynamics — the labor force participation rate fell again in November — may help explain why wage growth has remained sticky around 4%. We expect business leaders will continue to curb wage growth, hire with caution, proceed with strategic layoffs and drive stronger productivity to contain costs heading into 2025. We foresee the unemployment rate rising from 4.2% in November 2024 to 4.4% in 2025.  
  
  
• Robust but bifurcated consumer outlook: The US consumer engine lost some steam heading into the holiday season as real consumer spending grew only 0.1% month over month (m/m) in October following an upwardly revised 0.5% gain in September. While consumer spending momentum remains well supported by robust income growth, slowing labor market trends should lead to increased consumer prudence, especially for lower- to median-income families who are grappling with higher debt burdens and reduced savings buffers. We foresee gradually cooling consumer spending growth from 2.7% in 2024 to 2.2% in 2025 as slower employment growth weighs on income trends and prices and rates remain generally elevated. 
  
  
• Bumpy disinflation with upside risks: Despite a recent sticky inflation patch, economic fundamentals remain disinflationary, with more prudent consumer spending, reduced pricing power, easing housing cost inflation and non-inflationary wage pressures when factoring strong productivity growth. We expect the moderating trend in inflation will remain in place into early 2025, though it could then change as deregulation, potential immigration restrictions and tariffs lead to a renewed inflation impulse. In contrast to President-elect Trump’s first term, these inflationary pressures would come in a “new normal” paradigm defined by fragile supply conditions, elevated geopolitical tensions and structural upside risks to inflation. We foresee headline Consumer Price Index (CPI) inflation at 2.7% in Q4 2024, easing to 2.2% in Q4 2025 and picking up to 2.3% in Q4 2026. 
  
  
• More cautious easing cycle: Policymakers at the Fed will tread carefully going forward. As Fed Chair Jerome Powell recently noted, a resilient US economy means the Fed can afford to be a little more cautious with its rate-cutting cycle. Given cooling labor market conditions, strong productivity growth and moderating inflation trends, we continue to expect a rate cut of 25 basis points (bps) by the Fed at the December 17-18 policy meeting. Thereafter, we believe the Fed will decide to slow the recalibration process in 2025 as policymakers feel their way to a neutral policy stance and navigate upside risks to inflation. We see a rate cut at every other meeting through Q3, for a total of 75bps of easing (down from 100bps previously) in 2025.