Introduction
Following the recent election of Donald Trump, who will assume office in January, attention turns to how his administration's policies may shape the economic landscape in 2025. Economic predictions are notoriously challenging. The economy is a multifaceted and complex system, and assessments of its health are often hotly debated. This publication sets out to consider a few points, notably - the labor market, economic growth, the Federal Reserve’s monetary policy, the presidential election, climate change - in an accessible way to outline some expectations for the upcoming year. Although The topics are presented separately, each topic interacts with one another and cannot be considered entirely independent inputs of the economy. Each is a complicated and nuanced issue that could be explored in great depth. However, this publication does not set out to investigate any particular issue with extreme detail; instead, it provides a sufficient overview of the context and offers some insight into how these subjects may trend into 2025.
Labor Market
The prevailing narrative among discussions and tons on social media is that the job market is tough. It is hard to find employment and even harder to find gainful employment. However, high-level economic data may not align with individual experiences or reflect regions and demographics. Unemployment has remained stable, around 4% in the last 12 months, with a slight upward trend. This rate is at the low end of what is considered a healthy unemployment range. On a similar thread, we have seen a stable labor force participation rate(LFPR) over that same period. The LFPR has not fully recovered to pre-COVID-19 levels though it was already on a downward trend due to an aging population and technological innovation.
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Job growth presents a more nuanced trend that, at first glance, looks wholly positive. We have experienced somewhat steady, strong job growth every month over the last year. There was some fear of recession after weak growth from April to July, but those concerns were quelled following an especially strong September jobs report - 254,000 new jobs added. This job growth has been spurred primarily by government, education, construction, and service jobs. Additionally, immigration has been crucial in maintaining job growth as the native population ages out of employment.
fig 1.1
Yet not all sectors have not shared in the prosperity. In white-collar jobs, specifically jobs in finance and tech, job postings are sparse. Moreover, layoff and discharge rates among white-collar jobs have been significant over the last year. For college graduates, most of whom are seeking white-collar jobs, the tight labor market has given employers leverage to raise standards, and with modest forecasted economic growth they are in no hurry to fill those positions.
Looking ahead to 2025, the strong demand for blue-collar jobs, especially in construction and services, is expected to persist. However, Trump’s proposed immigration restrictions may alter this dynamic. Reduced immigration could exacerbate labor shortages in essential sectors, potentially driving wages upward but also constraining supply. White-collar sectors, particularly in tech and finance, are currently experiencing slower job growth, and the new administration’s focus on domestic manufacturing and trade could shift demand patterns further. As we move into 2025, blue-collar job demand is expected to remain strong, while white-collar opportunities may gradually increase alongside anticipated economic growth and consumption. For those in white-collar fields, career moves may warrant caution in the near term, as market conditions stabilize under new policy directions.
Economic Growth
Since the COVID-19 recession, the US economy has rebounded exceptionally well. Compared to other G10 nations, the US has experienced significantly higher GDP growth, driven in large part by the massive fiscal support for households and businesses. Typically, in a recession, there is a production and consumption gap where firms overproduce goods that consumers cannot afford - referred to as an output gap. Fiscal support enabled consumers to maintain consumption levels, except for a brief period during early lockdowns.
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Investment was robust throughout and after the COVID-19 recession with a decrease during Q1 of 2020 - the onset of the pandemic and lockdowns. Alongside consumption and government expenditure, investment has helped to maintain strong GDP growth. The only lagging component of GDP is net exports; the US has been a negative net exporter for the last 40 years, but the trade deficit widened dramatically after COVID-19 and has not returned to the pre-pandemic trajectory. This is not necessarily a negative for the economy; it can be attributed to the strengthening USD and a relative decrease in foreign consumption.
Technological advancement is a hot-button issue for good reason. Over the last year, we have seen massive investments in AI and automation. While overall adoption is currently low, certain fields have begun embracing AI and more will follow into 2025. Integrating this technology in a significant way will be a major X factor in economic growth. countries like the US and China (the US being ahead by a large margin) are investing highly in this area. The implications for the labor market are still yet to be seen, but it's speculated that AI and Automation will reduce the need for some menial and entry-level work while overall increasing productivity.
The Federal Reserve has projected a 2% GDP growth rate for 2025. While this represents modest growth, it is in line with expectations for a mature, developed economy. GDP growth in 2024 is expected to close near 3%, reflecting the economy’s current resilience. Going forward, growth in 2025 will likely be shaped by factors including consumer spending, ongoing technological investments, and fiscal policies under the new administration.
Following the recent election, increased government spending is anticipated as the incoming administration sets ambitious goals for its first year. This spending may further bolster GDP growth, especially if directed toward infrastructure and technology, providing additional support for consumer demand and investment. Assuming consumer spending remains strong and technological advancements continue, the U.S. economy is poised for stable, albeit moderate, growth in the coming year.
The Monetary Policy
Before discussing current monetary policy, it's helpful to provide a brief explanation of how the Federal Reserve (Fed) enacts monetary policy since there are a lot of misconceptions about how the Fed works and how interest rates affect the economy. The Fed has two goals, often referred to as its dual mandate: t (1) Maximize Employment and (2) Stabilize Prices. Through one of the primary tools setting the Federal Funds Rate- the Fed can raise or lower interest rates. Interest rates determine how expensive it is to borrow money: the higher the interest rates, the more expensive borrowing becomes, and vice-versa. When it is cheap to borrow money, firms and consumers have more means to consume and invest which spurs economic activity, increasing employment. However, this increase in economic activity also increases inflation, making prices unstable at a certain point.
Previously, COVID-19’s disruption to supply chains and government stimulus led to high inflation. That period has passed, and since mid-2022, we have been trending toward the Fed's target inflation rate of 2%. During the economic rebound from COVID-19, the Fed raised interest rates to fight against high inflation and did not begin lowering them until a 50-basis points rate (bps) cut in September of this year. Leading up to September’s meeting, there was discussion surrounding whether a 25-bps or 50-bps cut was appropriate. Ultimately, the Federal Open Market Committee(FOMC)deemed inflation sufficiently low in August to justify the more aggressive cut.
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At its November 6-7, 2024 meeting, the FOMC further reduced the federal funds rate by 25 basis points, setting the target range at 4.5% to 4.75%. This action aligns with the Fed's strategy to support economic growth while maintaining price stability. The Committee acknowledged that while inflation has made progress toward the 2% objective, it remains somewhat elevated. The FOMC emphasized its commitment to monitoring economic indicators and adjusting monetary policy as necessary to achieve its goals.
The Fed's projections suggest a cautious approach to further rate adjustments. While some forecasts indicate the potential for the federal funds rate to reach 3.5% by the end of 2025, this would require multiple rate cuts over the coming year. However, given the current strength of the labor market and sustained economic growth, such aggressive cuts may not be warranted. Maintaining a balanced approach will ensure that monetary policy supports employment and price stability without inadvertently fueling inflationary pressures.
Presidential Election
With Donald Trump recently re-elected, his administration has signaled a continuation and expansion of policies introduced during his previous term. Central to his economic strategy are tax reforms, trade tariffs, and immigration policies, each of which has implications for domestic growth, inflation, and employment.
Trump’s tax plan includes extending key elements of the 2017 tax code, which are set to expire at the end of 2025. Additionally, he proposes exempting certain income types—such as Social Security, tips, and overtime—from federal taxes, reducing the corporate tax rate, and repealing tax credits for green energy production and consumption. To bolster domestic manufacturing, Trump also plans to implement a 20% global tariff, with a more severe 60% tariff on goods from China. While this could drive American manufacturing, critics argue that such tariffs could raise consumer prices, disproportionately affecting lower-income earners who allocate a larger share of their income to consumption.
Immigration remains a major component of Trump’s economic agenda. His administration intends to increase deportations and restrict new immigration, which may impact labor supply, particularly in blue-collar sectors where immigrants make up a significant portion of the workforce. Economists generally agree that immigration contributes positively to GDP and helps offset the effects of an aging population on the workforce. However, reduced immigration could exacerbate labor shortages, driving up wages in certain industries but potentially limiting overall economic growth.
Housing policy is another area where Trump’s approach differs from previous administrations. He has proposed deregulating zoning laws to simplify the process of obtaining building permits, aiming to address housing supply issues. Trump also argues that by decreasing immigration, demand for housing could decline, potentially easing housing costs. However, reducing immigration may also increase production costs, as many construction jobs rely on immigrant labor.
Predicting the economic impact of Trump’s policies remains challenging, as campaign promises don’t always translate directly into policy. Nevertheless, early indications suggest that Trump’s fiscal policies could add to the deficit and potentially contribute to inflationary pressures. A survey of economists by the Washington Post found that many experts believe Trump’s policies are likely to increase deficits, inflation, and interest rates, which could have a lasting impact on the U.S. economy.
In the near term, however, any substantial economic shifts due to Trump’s policies may not take full effect until late 2025, limiting their immediate impact on growth and inflation. The economic landscape in the coming years will thus be shaped by a mix of continued Fed policy adjustments and incremental changes under Trump’s administration, with fiscal policy playing a significant role in the balance between economic stability and growth.
Climate Policy
With President Trump’s return to office, the U.S. climate policy landscape is set to undergo a notable shift, impacting specific projects and industries across the country. Trump’s administration previously emphasized energy independence, often favoring fossil fuel projects over renewable energy initiatives. This approach could shape the trajectory of both traditional and emerging energy sectors, influencing everything from carbon emissions to economic growth in clean energy industries.
Under the Trump administration, we can expect expanded support for oil, gas, and coal industries, including fewer regulatory restrictions and incentives to increase domestic production. This support may involve re-approving pipeline projects like Keystone XL and Dakota Access, which had been halted or restricted under Biden’s administration. The Trump administration is also likely to reverse federal land restrictions for drilling, which would open up new opportunities for fossil fuel extraction, particularly in states with abundant natural resources, such as Texas, North Dakota, and Wyoming. These policies are intended to reduce energy costs domestically and strengthen the U.S. energy supply chain, potentially benefiting states that rely heavily on fossil fuel revenues.
Renewable energy sectors, including wind, solar, and electric vehicles (EVs), may face new challenges under the Trump administration. Federal incentives and subsidies, such as the Production Tax Credit (PTC) for wind energy and the Investment Tax Credit (ITC) for solar projects, were expanded under Biden but may face reductions or removal in the coming years. Trump’s administration is also likely to review large-scale renewable projects, particularly offshore wind projects along the East Coast, which have received federal backing. These changes could slow the growth of renewable industries and make it harder for the U.S. to compete with international leaders in clean energy technology, particularly China and the EU.
The Biden administration prioritized climate resilience projects, including coastal protections, wildfire management, and flood prevention. Trump’s administration may shift these efforts toward traditional infrastructure, such as roads, bridges, and energy pipelines, rather than climate-focused initiatives. Projects aimed at mitigating climate impacts, such as sea walls or upgrading public infrastructure to withstand extreme weather, could lose funding. This shift could impact states with vulnerable coastlines and high wildfire risks, such as Florida, Louisiana, and California.
Trump’s previous withdrawal from the Paris Agreement signaled a shift away from international climate commitments. A second Trump administration is expected to further distance itself from international climate goals, potentially withdrawing U.S. support for global initiatives aimed at reducing carbon emissions. This isolationist stance may lead to trade implications, as other nations, particularly in the EU, consider carbon border taxes on imports from countries with less stringent environmental standards. Industries heavily reliant on exports, such as steel, aluminum, and agriculture, could be impacted if trading partners impose climate-related tariffs or penalties.
Conclusion
Overall, 2025 is shaping up to be a year of steady, moderate growth for the U.S. economy, though risks and uncertainties remain. The labor market's resilience, particularly in blue-collar sectors, alongside expected rate cuts from the Fed, is anticipated to fuel consumption and support investment. The tech sector’s adoption of AI and automation will likely enhance productivity, though the impacts on jobs remain uncertain. With the presidential election introducing fiscal and regulatory uncertainty, both domestic and international policies could shift significantly depending on the outcome. While forecasting always involves unpredictability, current trends suggest that the U.S. economy will experience measured growth and stability in the coming year.
