US 2025 Outlook: Trump’s Policies to Shape the Path Ahead

The policies of the incoming Trump administration are likely to drive the outlook for growth and inflation in 2025. We expect a ramp-up in tariffs early next year that leads to a pickup in inflation and slower investment growth. The negative growth impact from tariffs will likely only be partly offset by an extension of the Trump tax cuts and deregulation.

Solid Fundamentals

US real GDP has averaged above-trend growth for more than two years. Strong income growth and resilience in non-cyclical sectors have driven this expansion, not unsustainable credit expansion or overbuilding. Importantly, cyclical sectors which are prone to overshooting – like housing and equipment investment – have underperformed, limiting the risk that they drive a sharp correction.

Business Capex has Room to Grow

Business equipment investment tends to be one of the most cyclical components of overall growth – outperforming in expansions and leading the way lower in downturns. The current cycle has been unusual though — equipment spending as a percentage of GDP fell to near multi-decade lows in the COVID recession and has gone sideways since. In our view, this limits the risk of a sharp contraction, since businesses have not overinvested, and there are no signs of broad overcapacity. Moreover, the current economic expansion has not been driven by leverage, which makes it more sustainable.

Despite policy uncertainty as the Trump administration prepares to take office, we see a risk that business sentiment improves in the near term. At least some underperformance in investment spending in recent years could be due to recession fears that have not materialized. Election uncertainty may have held back business spending, suggesting the release of some pent-up activity now that it has passed. Business surveys have tended to react positively to right-wing election victories in recent cycles, and while this hasn’t always led to real spending and activity, we would not rule out a virtuous cycle of solid fundamentals and improving “animal spirits.”

Trump Tariffs 2.0: Our Expectations and Risks

President-elect Trump is proposing an aggressive trade policy, including higher tariffs. Specifically, during his campaign, he stated he would impose 60% tariffs on Chinese imported goods as well as 10-20% across-the-board tariffs. There is heightened uncertainty around not only “if” but also “when” and “how” the Trump administration might raise tariffs.

We expect Trump to largely follow through on his campaign promise to raise the tariff rate on China sharply and to implement broader tariffs against most other trade partners in 2025. We believe tariffs will take effect throughout the course of 2025, phasing in, as they did in Trump’s first term, rather than being implemented all at once. This should lead to upward pressure on inflation, beginning in Q2 2025 and persisting through the year.

There is a risk that Trump moves more quickly than we expect, raising tariffs rapidly upon taking office and leading to a more pronounced inflationary shock early in 2025.

Based on goods trade data in 2023, half of US imports from China are currently subject to existing tariffs under Section 301, which were initiated during the first Trump presidency. Given that the president has the authority to modify import restrictions imposed under Section 301, Trump can likely move quickly to raise tariffs on Chinese imports.

Limited Downside for Housing

High borrowing costs are likely to be a headwind for housing. However, the downside for activity should be limited by tight supply, already-sluggish home sales, and a large pipeline of multifamily construction projects. Elevated mortgage rates and poor housing affordability will likely weigh on homebuyer demand, but slow growth is more likely than an outright contraction.

Single-family housing supply is still tight. The vacancy rate of homes for sale is just 1.0%, near the pre-pandemic low. Demographic drivers of single-family housing should remain supportive in the near term, with the large millennial cohort reaching peak homebuying age. Limited supply of existing homes for sale and elevated homebuilder margins should also support new single-family construction.

Multifamily housing faces more of a headwind from overbuilding, with vacancy rates beginning to increase and rental growth decelerating. However, even though multifamily housing starts are likely to remain weak, a large pipeline of projects currently under construction should limit any slowdown in activity in the near term

Consumer Spending Appears Sustainable

Robust consumer spending has been the key driver of above-trend growth in recent years. Unlike past booms in consumption though, strong spending in the current cycle has been well-supported by income growth and healthy balance sheets.

Household balance sheets appear healthy. Total and revolving debt have risen roughly in line with income and, despite rising interest rates, total debt service remains historically low. Pockets of stress have emerged in recent years, including a rise in credit card delinquencies, but this appears to be more of a normalization than the start of a worrisome trend

Labor Market Cooling Gradually

We expect a gradual slowdown in job gains in 2025, with the unemployment rate remaining just-above 4%. Wages will likely continue to moderate. Overall, this leads us to expect a slower, but still-solid, pace of labor income growth next year.

Hiring and labor demand have been slowing, but we see tentative signs of stabilization. After a multi-year decline, household survey measures, including the Conference Board labor differential and NY Fed Survey of Consumer Expectations, show workers recently became more optimistic about finding jobs.

Meanwhile, layoffs are likely to remain subdued. Financial conditions for businesses are easy, and we see few signs of cashflow strains.

Lead indicators for wage growth suggest further deceleration is likely, but the slowdown is likely to be gradual. Quits and hiring rates have dropped below their 2019 levels, and service-sector surveys show slowing wage-growth expectations. Meanwhile, strong labor productivity and solid revenue growth suggest businesses still have capacity to raise wages, making a sharp drop-off unlikely.

Policy Shock

Policy shocks from the incoming Trump administration may test the economy’s strong fundamentals. We see the net impact from policy as modestly negative, with a drag from tariffs (and broader trade uncertainty) outweighing positives from deregulation or anticipated fiscal stimulus.

We expect Trump to largely follow through on his campaign promise on tariffs, raising the tariff rate on China aggressively and implementing broader tariffs against most other trade partners in 2025. We expect Trump to raise tariffs on Chinese goods in a piecemeal manner, starting in Q1 2025. Broader tariffs could take longer to implement, and we expect certain close allies will be exempted.

Tariffs would likely lead to higher inflation, as well as a modest drag on growth. Tariffs would lead to a tax burden on US residents, similar to a VAT or consumption tax. In addition to the direct impact on personal consumption, policy uncertainty from combative trade policy will likely weigh on business investment. Lingering threats of additional tariffs and contentious trade negotiations should make businesses reluctant to carry out long-term fixed investment, as was the case during the latter half of Trump’s first term. In addition, across-the-board tariffs would likely cause disruptions to global supply chains, which might push up intermediate goods prices and reduce manufacturing activity.

We expect a second Trump term to bring a revival of anti-immigration rhetoric, as well as policy changes to limit the inflow of new immigrants. Mass deportations would face significant logistical hurdles though, and we would not expect a substantial increase as our base case. Slower inflows of immigration would likely weigh on trend employment growth, but we are skeptical that this is a meaningful driver of trends in inflation or wages.

Trump is likely to follow through on his campaign promises to deregulate the energy and financial sectors. On the margin, this could lead to some additional investment and easier credit conditions. However, these policies are not uniformly pro-growth. Notably, any attempts to undercut Biden-era industrial policies like the Inflation Reduction Act could lead to a pullback in business spending and add to a climate of business uncertainty.

We expect fiscal negotiations in 2025 will largely focus on extending expiring provisions of Trump’s 2017 tax cuts. Trump proposed numerous additional tax cuts during the 2024 campaign, but we are skeptical that rank-and-file Republicans will support meaningful incremental stimulus. Extending the 2017 tax cuts will increase deficit estimates relative to the current CBO baseline, but we would not expect a significant impact on growth and inflation.

Despite proposals to reduce spending and federal employment, we doubt the Trump administration or his advisors in the planned Department of Government Efficiency will have a significant impact on fiscal policy. Spending decisions are ultimately left to Congress, leaving little room for the White House to unilaterally tighten policy. Moreover, career civil servants are largely protected from politically motivated layoffs. One possibility would be a temporary government hiring freeze, allowing employment to decline through attrition. Hiring freezes have occurred in the past, most recently early in the first Trump administration, and can have a modest (and temporary) negative impact on government payrolls.

The Fed is Likely to Pause Rate Cuts

We expect the Fed to cut rates only once in 2025, with solid growth and rising inflation leading to a prolonged pause after a March cut.

Importantly, we do not believe the Fed will be willing to “look through” high inflation that is driven by tariffs or other inflationary policies. Inflation has been above the 2% target for four years, and accommodating further “temporary” overshoots could call the Fed’s credibility into question. The 2021 inflation surge has also led officials to question the traditional orthodoxy which distinguishes between supply- and demand-driven inflation. We expect the Fed will be cautious so long as realized inflation remains elevated, with the easing cycle on hold until it is confident that tariff-driven price increases are not broadening out into inflation expectations, wages, or prices of domestic goods and services.

Risks to Our View

The policy priorities of an incoming Trump administration are the key risk factor for 2025.

Our forecasts assume an aggressive implementation of tariffs against China and other trade partners. If Trump and his advisors deprioritize trade or treat tariffs more as a tool for negotiations, then there would likely be less upward pressure on inflation than we currently forecast (although trade uncertainty may still be a drag on growth even if these policies remain threats).

There is also two-way risk for fiscal policy. We assume Congress will focus on extending expiring tax cuts, which helps to avoid fiscal contraction but does not provide much incremental stimulus. If Trump successfully negotiates for additional tax cuts, then that anticipated stimulus could boost sentiment for markets and businesses. Conversely, there could be a growth drag if Trump follows through on his proposals to reduce deficits or dramatically cut the federal workforce with assistance from congressional Republicans.

Aside from policy, there continues to be a small but not-insignificant risk of a recessionary downturn. Financial conditions and credit supply are currently accommodative, but market sentiment can change quickly, and a reversal can be more economically painful coming from lofty valuations. Notably, throughout the current cycle, the Fed and markets have tended to react strongly to any signs of labor market stress. Even if underlying growth remains healthy, ordinary data volatility could lead to a renewed slowdown scare.