The Economy Is Finally Stable. Is That About to Change?

After five years of economic uncertainty, the U.S. economy is concluding 2024 in arguably its most stable state since the onset of the COVID-19 pandemic.https://wordpress.com/

Inflation has eased, unemployment remains low, and the Federal Reserve has started to cut interest rates. The recession that many had predicted has yet to materialize.

However, the economic outlook for 2025 remains clouded, primarily due to one significant factor: President-elect Donald J. Trump.

Throughout his campaign and in the aftermath of his election, Trump has proposed sweeping policy shifts that could have far-reaching — and complex — effects on the economy.

His proposals include imposing hefty new tariffs and deporting potentially millions of undocumented immigrants, moves that many economic models suggest could result in higher prices, slower growth, or a combination of both. Meanwhile, he has promised tax cuts for individuals and businesses, which could spur faster economic growth but also increase deficits.

Additionally, he has committed to slashing regulations, which could boost corporate profits and overall productivity. However, critics warn that these changes might also lead to higher worker injuries, environmental harm, and increased vulnerability in the financial system over time.

No one can say for certain which policies Trump will prioritize, when they will be implemented, or how much of his agenda will pass through Congress and the courts. As such, predicting the economic landscape for 2025 and beyond remains highly uncertain.

“It’s a very uncertain outlook, and much of that uncertainty comes from potential policy changes,” said Michael Gapen, Chief U.S. Economist at Morgan Stanley.

While some Americans might argue that the economy is far from stable, citing high prices on essentials like food and housing, consumer sentiment has begun to recover, even before the election, and continues to improve. This suggests that many believe the economy is on the path to normalizing.

Officially, Gapen and his colleagues predict that U.S. GDP, adjusted for inflation, will grow slightly over 2% next year, which aligns with other Wall Street forecasts. This would mark a modest slowdown from this year’s growth of more than 2.5%, consistent with a cooling period following the rapid post-pandemic recovery.

However, Gapen is cautious about his forecast.

“There’s a wide range of possible outcomes, and a baseline outlook is less useful than in normal times,” he said.

Since the election, stock prices have surged, signaling that many investors are optimistic about the future, anticipating fatter profits and quicker growth. Many appear to be betting that Trump will prioritize tax cuts and deregulation while taking a moderate approach on trade and immigration. Investors also celebrated his appointments of Wall Street executives, particularly hedge fund manager Scott Bessent as Treasury Secretary, hoping they will dissuade Trump from pursuing the most aggressive tariff policies.

But this optimism could be misplaced. On immigration, Trump has appointed hardline figures, such as Thomas Homan, his “border czar,” and Stephen Miller, his deputy chief of staff, suggesting that his stance on immigration will be tough. Additionally, despite Bessent’s appointment, Trump continues to push for tariffs, recently announcing via social media that he would impose 25% tariffs on imports from Canada and Mexico unless they curb drug and migrant flows into the U.S.

“Markets are too serene about trade and immigration policies, which I think is unwarranted,” said Michael Strain, an economist at the American Enterprise Institute, a conservative think tank. “Trade and immigration policies could be extremely disruptive to the economy.”

Strain outlined a worst-case scenario in which heavy tariffs deter investment, mass deportations reduce the labor force, and growing deficits increase borrowing costs. In such a scenario, Americans could face both rising prices and stagnating growth — a combination of inflation and economic stagnation (stagflation) not seen since the 1970s.

“In this scenario, the cost of imported goods, groceries, restaurant meals, and homes would all skyrocket,” Strain explained.

While Strain isn’t predicting these outcomes, he cautions that Wall Street might be overlooking this possibility. He points to Trump’s first term, during which he imposed steep tariffs on both allies and adversaries. Though the impact was modest, economic research shows that such policies led to higher consumer prices and slower growth.

The context this time is notably different. When Trump assumed office in 2017, the U.S. economy was emerging from a slow recovery following the Great Recession, with both inflation and interest rates remaining low for years. This time, he inherits an economy that is stable but slowing. Inflation has moderated but still exceeds the Federal Reserve’s 2% target, and the effects of past price increases are still fresh in consumers’ minds. Interest rates, though lower than in the past, remain high, and the Fed has reduced them at a slower pace than expected.

These factors suggest that consumers and policymakers may be less tolerant of higher prices than they were during Trump’s first term. While the Fed recently cut interest rates for the third consecutive meeting, many economists believe it will be hesitant to lower them further until the effects of Trump’s policies become clearer. This could dampen economic growth and possibly lead to higher unemployment.

Though recession fears have diminished this year, policymakers are still grappling with a key challenge: how to reduce inflation without significant job losses. Inflation eased rapidly in 2023 but has proven more persistent in 2024. Unemployment, at 4.2% in November, remains low but has risen slightly, and it is taking longer for unemployed workers to find new jobs — a sign that the job market may be weaker than it appears.

“If there’s one area to be concerned about with the economy right now, it’s the labor market,” said Aditya Bhave, senior economist at Bank of America.

Nevertheless, forecasters have consistently underestimated the resilience of the U.S. economy in recent years, and there are several reasons for continued optimism. Household debt remains low relative to income, indicating that consumers have the capacity to continue spending. Productivity growth has been strong, and the rise of artificial intelligence could further drive this momentum. Most investors still see the U.S. as a safe bet for investment, especially in comparison to other global markets.

“This time last year, many expected the economy to be in a recession or facing serious inflation issues,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “But now, we are less concerned about a recession.”