US economic outlook: December 2024

Economic growth downgraded in 2025

We have revised our economic forecast for next year lower in light of the higher likelihood of new tariffs in 2025. Tariffs imposed during President Trump’s previous administration were met with retaliation from our trading partners, a combination apt to depress exports, real incomes and consumer spending. We assume that new tariffs will go into effect in the second half of next year, at which time we expect economic momentum to downshift.

Growth appears likely to pick up in 2026 once the initial impacts of the tariffs fade and the full suite of Republican policy changes go into effect. Specifically, the economy would receive a boost from a lighter regulatory touch and the prospect of additional modest tax relief for households.

Absent tariffs, the jobs market is already trending softer. Payroll growth is highly concentrated among industries and labor force growth has slowed considerably. Although the unemployment rate remains low, there is clear upward movement in the number of permanent job losers and the median duration of unemployment, trends that have historically predated recessions.

Meanwhile, dis-inflation is proceeding at a frustratingly slow pace. The Fed’s preferred inflation gauge has been more or less unchanged for the past six months amid a slowdown in goods deflation and still-firm price pressures in the services sector. The Consumer Price Index came in above expectations in November, but with an encouraging deceleration in services inflation.

Incoming inflation data likely warrant further Fed easing, but at a slower pace. Although new tariffs would trigger a temporary reacceleration in inflation, we suspect that the FOMC will disregard the inflationary bump and more heavily prioritize the tariff-driven hit to GDP and job growth. We anticipate that the FOMC will enact another 25 bps cut at its December meeting and then switch to an every-other-meeting cadence with cuts in March, June and September 2025, leaving the federal funds rate within a target range of 3.50%-3.75%

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