Economists See Reasons for Optimism for Solid Year

In putting together an economic forecast for any given year, economists have to figure out a wide range of factors, from inflation to interest rates to policy decisions.

Figuring out how 2025 might go requires consideration of yet another factor: President Donald Trump.

On the 2024 campaign trail, Trump talked about a number of economic issues – tariffs, tax cuts, deporting millions of illegal immigrants, deregulation – he might embrace, any of which could impact the U.S. economy.

At press time, he had already threatened 25% tariffs on Mexico and Canada (though he later paused them) and actually imposed a 10% tariff on goods from China. Tariffs on imported steel and aluminum were scheduled to go into effect in late March.

Lupe Ramirez, vice president and senior corporate commercialization manager for Comerica, said the 2024 election results “mark the start of a new chapter” for the U.S. economy, with major policy changes set to influence everything from tax structures and trade dynamics to inflation and interest rates.

 

“(Trump) will be stepping in with a bold agenda, focusing on tax cuts, deregulation and increased tariffs,” Ramirez wrote on the company’s website. “These initiatives aim to spur economic growth and industrial production, but they also introduce new dynamics that could impact consumer prices, hiring trends and more. As the new administration’s policies take shape, their ripple effects will be felt across industries and households.”

As Trump entered office, the American economy appeared to be humming along.

According to statistics released by the Commerce Department last month, the economy expanded at a 2.3% annual rate from October through December. For all of 2024, the economy grew at a 2.8% clip, compared with 2.9% in 2023.

The fourth-quarter growth was a tick below the 2.4% economists had expected, according to a survey of forecasters by the data firm FactSet, the Associated Press reported.

Consumer spending grew at a 4.2% pace. That’s the fastest since January-March 2023 and up from 3.7% in July-September last year. But business investment tumbled as investment in equipment plunged after two straight strong quarters, according to the AP report.

The report also showed persistent inflationary pressure at the end of 2024. The Federal Reserve’s favored inflation gauge — called the personal consumption expenditures index, or PCE — rose at a 2.3% annual pace last quarter, up from 1.5% in the third quarter and above the Fed’s 2% target, according to the AP.

Paul Ashworth, chief North America economist at Capital Economics, told the AP the “… economy remains strong, particularly given the fourth-quarter disruptions,’’ including a strike at Boeing and the aftermath of two hurricanes.

 

Jeffrey Korzenik, chief economist for Fifth Third Commercial Bank, agreed the economy was performing relatively well as 2025 dawned.

“I think it’s an economy running at close to full potential,” said Korzenik, who earned a bachelor’s degree in economics from Princeton University. “Of course, that’s relative. In the ‘50s and ‘60s, ‘full potential’ was close to 4%. In the ‘2020s, it’s 2%.

“We’re still growing, but we’re starting to grow at a much more normal rate, which normal these days means 2%,” he added. “There are a couple of more risks to the downside, but not so much recession risks, rather slower growth.”

Bill Adams, a senior vice president and the chief economist at Comerica, agreed the U.S. economy was in “pretty good shape” headed into the new year.

“Inflation is much better behaved than it was in 2022 or 2023,” Adams said. “Incomes have been growing faster than prices for over two years … And with that, the Fed has been able to start reducing interest rates to a less restrictive level.”

Adams pointed out there are still strains on household finances for low- and moderate-income households who have been hit harder by increases in rent and the cost of living over the last few years. But the average household, he said, is “benefiting from the increase in home equity with higher house prices,” and spending is being supported by those households that are homeowners, many of which refinanced in 2020 or 2021 and have been less affected by the increase in cost of living.

 

Adams is among the large group of economists who believe Trump’s tariffs, depending on how many he puts in place and against whom, might not benefit the U.S. economy much.

“I’m expecting them to raise prices for goods … Tariffs are intended to make the price that manufacturers can sell their goods at in the United States higher,” Adams said. “So, if you’re running a manufacturing business, you’re looking for a job in a manufacturing business, you own a manufacturing business, tariffs could help you.

“And the ISM manufacturing, PMI has been capturing a lot of quotes from people managing manufacturers who are excited about tariffs, think it’s going to be good for their businesses,” he added. They see that as a pressure on margins, bad for profitability, making their businesses harder to manage. So, it’s a policy that favors manufacturing over service-providing businesses.”

He said the net effect for consumers is going to be higher inflation in the near-term.

“I think tariffs … for Americans who work in manufacturing maybe will benefit more from higher incomes or more plentiful jobs than the effect of higher prices for other consumers,” Adams said. “I think it’s harder to see where the benefit comes.”

Though he has followed through on his threats of tariffs on China, Korzenik thinks Trump uses that threat as more of a negotiating tactic than anything.

Trump may have proven his point by backing off on the threats to Mexico and Canada. He backed off both after leaders of those two countries made concessions to help with illegal immigration and the flow of fentanyl into the U.S.

Korzenik predicted that, if he does them at all, Trump will impose the tariffs through executive order, which he has done so far.

“I don’t think there’s much legislative appetite for tariffs,” Korzenik said.

After the Commerce Department statistics showed solid growth in 2024, Comerica’s Adams thinks more growth could be coming this year.

Last year, he said, growth was driven by a lot of stimulus directed at the green economy and renewables fueling investment in new factories in the United States. Growth this year could be driven, at least in part, by the political shift – Republicans kept the House and regained control of both the Senate and the White House – in 2025, citing a University of Michigan survey that breaks consumer confidence down by political leanings that found – “Unsurprisingly,” he said – the right-leaning consumer confidence shot up.

“That’s typical after an election … You see it mirror the flip in control,” Adams pointed out. “I think that is going to drive more consumer spending by older Americans, more risk appetite from small business owners, groups that skew conservative in our country.

“We’ve already seen a stabilization in job openings from the spring to the fall of 2024,” he added. “I think job openings are likely to increase (in 2025) as a result of that. On top of that, I think the business sector is going to be anticipating an extension of the 2017 tax cut and reacting to that. And so yeah, I think that’s the big story for this coming year.”

Fifth Third’s Korzenik wonders if the number of job openings will matter to a country already having trouble finding workers to fill them.

He believes a labor shortage, which will be exacerbated by current immigrant deportation policies, could cause inflation to continue to be an issue.

“Even without deportations, there’s been a huge chilling effect on the border,” Korzenik said. “Southwest Land Border encounters is the section on the customs and border patrol website, and there was this dramatic slowing of people coming over the border because … when both parties kind of embraced a tough-on-border policy.

“So what I think a lot of people, including myself, missed over the last couple of years is how much we were able to grow our labor force with people who were coming across without traditional legal immigration,” he added. “So that means refugees, asylum seekers, and unauthorized illegal aliens, whatever you want to call them. And that has been an enormous supplement to our labor market growth. And I think that’s behind us. Even without deportations or anything like that, you’re just going to lose that growth factor.”

Part of the reason for the growth factor in the labor force could be the sheer length of time it takes immigrants – legal or illegal – to settle into society.

Adams points out “it takes a while” for people to settle in, find a home, make relationships and find a job.

“I think we probably are still in the sixth or seventh inning of people who came to the United States in recent years settling into the labor market and their labor force participation rising,” he said. “So, I think that cohort is likely still contributing to labor force growth in the first half of 2025.

“As far as the impact of deportation, that’s a question of how much,” he added. “The more people it affects who are working in the United States, the more it will tighten the labor market and our forecast. We sort of make an assumption about that, where net immigration to the United States probably falls to around zero.

And so that does cause the labor market to tighten. There are a lot of moving parts … But I think that tighter immigration policies in general are one of the reasons why we think the unemployment rate is probably near a near term peak and is likely to move back under 4% in late 2025.”

Another factor in how the U.S. economy might perform is what actions are taken by the Federal Reserve, which is expected to slow the rate of reduction in its benchmark interest rate.

According to Comerica’s Ramirez, the Fed is expected to reduce the federal funds rate by 0.75% in 2025.

“The Federal Reserve is expected to take a measured approach to rate cuts in 2025, reducing the federal funds rate by 0.75% over the year,” Ramirez wrote. “While this signals some easing, the cuts are less aggressive than previous cycles due to steady economic growth and inflationary pressures.

Long-term yields, he said, such as the 10-year Treasury, are forecast to average between 4.25% and 4.75%, which will influence borrowing costs for businesses and individuals. This balanced approach reflects the Fed’s goal of maintaining economic stability while mitigating inflation risks.

For borrowers, modest rate cuts could lower the cost of financing. Businesses may find opportunities to secure more favorable terms for expansions or capital projects, while consumers could see slightly reduced costs for mortgages, auto loans and personal loans.

Federal Reserve officials consider the inflation rate – their target rate is 2% — in determining what to do about interest rates. Adams thinks there’s a “good chance” inflation could hold steady (it was at 2.9% at press time) in the near term, then pick up in the second half of the year because of higher tariffs.

His economic forecast sees a cut in March and then another cut in June.

“I think to the Fed 3% inflation isn’t 2%, but it’s also not 9%,” Adams said. “And so the Fed sees inflation as not yet ‘mission accomplished,’ but no longer an emergency either. And on the other side of their mandate, the Fed no longer thinks of the job market as especially tight, and the unemployment rate’s been trending higher over the last 12 months. The Fed’s mandate tells them to balance maximum employment with inflation. And at 4.2, 4.3% unemployment, that’s when the labor market side of that mandate starts to matter more.”

Korzenik agrees the Fed is likely to slow its rate cuts – “It’s going to be very limited interest rate relief,” he said — because the Fed will have limited ability to cut rates with inflation persisting. He’s expecting “two or three” more cuts.

“The problem is bond interest rates,” he said. “The 10-year treasury performs over time very well in line with real growth plus inflation. So, if you take real growth long-term at 2% and you assume that inflation is stuck around 2.5%, that’s a half percent. But that’s right where the 10-year yield is today. And so don’t think even with a couple of rate cuts, I don’t think the 10-year comes down. In fact, maybe it even goes up.

“And even if it goes down the traditional way that lower interest rates help the consumer is it allows people to refinance,” he added. “But with 6- or 7% mortgages and everyone locked in 3% or below, that’s not going to transmit relief to the consumer.”

One of the major plans Trump has is to make the tax cut he got passed in 2017 permanent. At press time, House and Senate leaders were bandying about competing plans for how to do that.

Ramirez called it a “cornerstone plan” for the new administration.

“Anticipated tax cuts aim to enhance disposable incomes for consumers and boost corporate profits, creating a ripple effect across the economy,” Ramirez wrote of the plan. “While the full implementation of these cuts will likely come in 2026, their impact will be felt earlier, as optimism around increased spending and investment drives economic activity in 2025. Businesses may see enhanced cash flow, and higher consumer confidence could further stimulate demand in key sectors.”