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Significant post-election policy changes for a robust US economy that doesn’t always feel like one
Outlook: It’s the economy. US election exit polls confirmed that Americans voted with their pocketbooks. According to exit polling conducted by NBC News, the economy was the second most important issue for voters, after democracy, with 75% of voters noting “moderate to severe hardship” from inflation (implying cumulative price increases since 2019).This contrasts with the underlying robust state of the US economy, growing at a solid 2.7% year over year (y/y) pace in Q3 2024 with an unemployment rate at a historically low 4.1% and Consumer Price Index (CPI) inflation at a moderate 2.6% in October.
Looking ahead, solid income growth, pro-cyclical productivity growth and strong labor force participation should remain the key pillars of US exceptionalism even if GDP growth cools toward its trend pace. Stronger private sector confidence on the prospects of pro-business policies and deregulation is likely to support spending and investment in the near-term, but policy uncertainty and increased protectionism will likely act as offsetting constraints. We foresee real GDP growth averaging 2.7% in 2024 but easing to 2.0% in 2025 and 1.6% in 2026
Election impact: Our new baseline incorporates deregulation efforts in the energy, banking and M&A space, restrictions on immigration, increased transactional protectionism and tax cut extensions. Factoring those policy shifts, we foresee no visible change to GDP growth in 2025, a 0.3 percentage points (ppt) drag on growth in 2026 and a 0.2ppt drag on growth in 2027. We also anticipate a marginal boost to inflation of 0.1ppt by the end of 2025 and a 0.3ppt boost by Q4 2026.
Gently cooling labor demand: The economy only added 12,000 jobs in October amid disruptions from Hurricane Helene and Hurricane Milton and a strike at a major aircraft manufacturer. While the October payroll report was too muddy to extract a signal, the totality of data on labor market flows, employment, productivity and compensation point to softening labor demand. We expect business leaders will continue to curb wage growth, hire with caution and proceed with strategic layoffs to contain costs heading into 2025. We foresee the unemployment rate rising from 4.1% in October 2024 to 4.5% in 2025.
Robust but bifurcated consumer outlook: Retail sales maintained solid momentum in October, and upward revisions to September point to strong spending into late summer. Still, a closer look at consumer spending trends point to prudence, especially for lower- to median-income families with higher debt burdens and reduced savings buffers. We foresee gradually cooling consumer spending growth from 2.6% 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: Near-term inflation bumpiness – with CPI inflation rising to 2.6% in October and core inflation steady at 3.3% – doesn’t detract from the fact that fundamentals remain disinflationary. That narrative will remain in place into early 2025, but it could then change as deregulation could support upside risks to growth and inflation, and immigration restrictions could lead to renewed labor market tightness and wage pressures. Going into 2026, tariffs and tax cuts could generate more inflationary pressures. In contrast to President-elect Trump’s first term, a rise in protectionism, curbs to immigration and larger budget deficits would come in a “new normal” paradigm defined by fragile supply conditions, elevated geopolitical tensions and structural upside risks to inflation. We foresee headline CPI inflation around 2.5% in Q4 2024, easing to 2.2% in Q4 2025 and picking up to 2.3% in Q4 2026.
Gradual easing cycle: The Federal Open Market Committee (FOMC) voted to cut the federal funds rate by 25 basis points (bps) going from 4.75% to 4.50% at the November meeting. Given robust but gently decelerating economic activity, strong productivity growth and softening inflation, we continue to expect a 25bps rate cut from 4.50% to 4.25% in December. Thereafter, we believe the Fed may decide to slow the recalibration process as policymakers more carefully feel their way to a neutral policy stance. Considering the elections results, we now assume a rate cut at every other meeting in 2025, for a total of 100bps of easing, down from 150bps previously. Important, risks are titled toward less monetary policy easing in 2025-26.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
