US Economy Expected to Accelerate in 2025, Despite Challenges Ahead
The US economy is expected to accelerate in 2025, despite facing a range of challenges, including elevated interest rates, a potentially weakening labor market, and a volatile political climate on Capitol Hill. According to Joseph Brusuelas, chief economist at RSM, there is a strong probability that the economy will continue to outperform, with real gross domestic product (GDP) expected to accelerate at a 2.5% rate in the year ahead.
Brusuelas attributes the positive outlook to strong household consumption, fixed business investment, and productivity-enhancing investment in equipment, software, and intellectual property. He also notes that the economy is driven by a real investment story, with portfolio managers needing to keep a close eye on the trends.
The main drivers of growth are expected to be household consumption, fixed business investment, and productivity-enhancing investment. Consumer spending has held up despite higher prices, with retail sales rising 3.8% for the full year through November. Corporate profits are also expected to see another big year, with S&P 500 companies forecast to see growth of 14.8%.
However, there are several challenges ahead, including the potential for a recession, which Brusuelas estimates carries a 15% likelihood. Other concerns include the state of the labor market, with lingering concerns over the level of long-term unemployment. The Federal Reserve’s forecast for inflation in 2025 is 2.5%, and it does not expect to hit its 2% target until 2027.
The Fed’s interest rate policy is also a key factor, with futures traders pricing in only one or two more cuts in 2025. This could keep borrowing costs elevated and put pressure on the trillions of corporate, personal, and government debt in the US.
Despite these challenges, the outlook for the US economy in 2025 is generally positive, with many experts expecting strong returns in the stock market. The consensus average for the S&P 500 is around 6,678, implying a roughly 12% gain from current levels.