Exactly about a year ago I wrote a blog post talking about the year ahead in 2024 (The year ahead 2024 – predictions of an armchair economist – Money Can be Simple) in terms of the Economy. I even went on to make a prediction on whether there was going to be a recession or not. Guess what? I am happy to say I won that wager made at the bar. 🙂. And so now, I have happily launched the armchair economist series of blog posts – until my predictions all go south and I go back into the fetal position 🙂
Jokes apart, I am keen to follow last year’s article with an article about 2025. Not because I am feeling triumphant about my successful 2024 prediction, but because I do think with everything going on around the world and specifically the US, I feel like there is a need to put things in some form of context. As my readers know, I typically veer away from personal opinions but as always I want to lay out the facts and a framework to think about this. This article will focus on the US economy – I do think even if you are a reader not in the US, you will want to keenly follow what is happening in the US as it impacts a lot of countries.
Let’s begin by looking at the indicators I explained in my article last year.
- GDP growth: Growth has definitely slowed from 2023 but still very healthy US GDP growth rates in 2024. Overall, the US GDP grew around 2.5% in 2024 compared with 3.2% in 2023. That’s very impressive for an economy the size of the US. It is notable that consumer spending still continues to power the US GDP growth. Business Investment actually has gone negative.
- US unemployment / jobs growth rate : Job growth has slowed a bit and unemployment has ticked up a bit to 4%. BUT, still pretty healthy.
- Inflation and Real-Wage growth: Inflation has stayed sticky at around 3% through 2024 (still much lower than the highs) but higher than the FED target of 2%. Having said that, real wage growth (after inflation) is still around 1% which is good because that continues to fuel the consumer to spend more.
- US Consumer debt and personal savings rate: The US personal savings rate has been declining and has reached historic lows (slightly below 4%). That is unfortunately indicative of the high prices for everything. And inversely, the US consumer debt continues to go up for the same reasons. But, don’t get fooled by the increases. The US debt as a percentage of disposable income still remains at historic lows. So while debt in absolute terms has been increasing, so has disposable incomes.
So this is where you are probably expecting me to make another prediction for 2025. If I was simply looking at the above data, I would have said 2025 will be another year with no recession again…
HOWEVER….
We have some headwinds that create some dramatic uncertainty
And it comes from the pretty dramatic policy pivots being made at the US Executive Branch, i.e. The White House. Unless you have been living under a rock, everyone is well aware of the items that have dominated the news cycle since Jan 20th 2025. With the ushering of the new Trump government, we have a couple of things that can upend this growth trajectory. But its highly uncertain and unfortunately, this high uncertainty leads businesses to pause spending and cause some short term disruptions.
- Tariffs – speak to any economist and he/she will tell you that tariffs can unquestionably increase prices and cause inflation to spike at least in the near term. However, given the perception that the government is using tariffs to drive non-economic outcomes around immigration and drugs, its unclear to everyone if tariffs will actually occur. Tariffs can hurt some industries significantly and cause unemployment in those industries to spike.
- Deportation of illegal immigrants – you might ask why this is a problem. The real issue is that a large majority of these immigrants work in US farms and factories doing jobs that domestic US labor does not (either because they dont want to or because domestic labor is not available). These industries stand to get upended – its not even clear if they can get labor even if they are willing to pay more. Unfortunately, this immigrant labor pool has become a structural part of the economy and these industries.
- Increasing unemployment in the federal government – with the increasing cost cutting and slashing of government agencies and employees, we should expect to see a dramatic upturn in unemployed white collar government workers looking for jobs. Without a doubt, in the near term, it will show up in the jobs and unemployment numbers. What is also pertinent to note is that the job growth in the last couple of years has been a bit skewed in certain industries including the government. So, this is going to have an impact on the jobs numbers.
These are the things that I see with the potential to shake things up in the near term, i.e. 2025. There are a number of other things that will likely have longer term impacts. As I mentioned, the uncertainty causes businesses to dramatically reduce capital spending and even hiring. Some of this already shows up in the GDP numbers as noted earlier in this article.
On the other hand, we are also expecting to see favorable tax policies that can have a positive impact on the consumer and US companies. It’s unclear though if this will show up as a positive impact in the near term in 2025.
Job market has tightened quite a bit for white collar workers
Even prior to the recent headwinds, it is important to note that for a lot of white collar workers, it has felt like a recession. In fact, it is being called a white collar recession. This is being driven by a combination of short term capital spending cuts as well as a correction of over-hiring from the post pandemic era. There is also talk of AI reducing the need for some types of white collar workers but its too early to call that.
US Deficits continue to rise
I already talked about this in my last article as well as in detail in my article Why do we need to care about the government deficit? – Money Can be Simple. So I wont rehash this point. Needless to say, this is a problem that needs to be solved or else we will be in trouble.
Concluding thoughts
The fundamentals of the US economy remain strong. In fact, relative to the rest of the world, the US is economically on extremely strong footing now. The only reason I am unable to confidently make a prediction for 2025 is because of the recent uncertainty. Having said this, I am very confident in the US economy and believe the US economy will continue to persevere and grow. I wont be surprised if we look back at 2025 and see another year of growth without a recession.
Thank you for reading and I wish you luck in your personal finance journey!
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
