Despite uncertainty about policy with a new president and a Republican Congress about to be seated, analysts remain mostly upbeat about the U.S. economy in 2025.
And, Ragan believes “that’s kind of what the markets are reacting to the last few weeks, the fact that it’s going to be harder to get that last mile of inflation down.”
Consumer spending is likely to slow somewhat in 2025, he said, but GDP growth should be close “to 2%, plus or minus a little bit,” he said. “And so not necessarily an acceleration there, but 2% is still a fairly healthy number.”
As for the federal budget deficit, “The feeling is that you’re probably going to get better tax revenue from individuals in 2024 because it’s been such a strong year, and then a lot of capital gains tax to come in,” Ragan said. “So, the deficit could be a little bit lower than expected.”
And while the deficit may impact economic growth, he said, “maybe it doesn’t become a crisis, but I think it’s something that is a risk for investors and probably limits the upside in the market and equity markets.”
The yield curve’s positive slope, and the 10-year yield, suggests the bond market doesn’t foresee a slowdown, Ragan noted. “I think there’s less chance of a recession now, at least in 2025 we just don’t see data kind of supporting that.”
Rising inflation would be a risk to the bond market, he said.
“I guess you could tie that to the administration coming in, so if the Trump tariffs are enacted aggressively early on, that could create some disruptions, a lot of volatility, and so we have to kind of get through that first 100 days of the Trump administration to see how that goes,” he said.
If the Federal Reserve sees “actions that start to show up in the data, they can actually act pretty quickly.”
Tariffs could also force the Fed to act, he said.
The Fed will prepare if tariffs are imposed, but it’s a “coin toss” as to whether they’ll act before the data show there’s a problem, he said. “I don’t think the Fed is going to get out in front of that very much, because it could jeopardize their mandate to maintain full employment,” Skancke said.
As for reining in the deficit, Skancke said, “I don’t think that Donald Trump cares much about it. He cares about cutting taxes more.” Still, he added, “I don’t think that the House is going to be a willing partner in increasing the deficits.”
Should there be signs of a rising deficit, Skancke said, “you’re going to see Treasury rates kick up again. I mean, 25 basis points in the 10-year treasury, that’s a big jump.”
And the magnitude of the increase could be an issue. “Right now it’s projected to be something like $1.8 trillion,” he said. “I think he’s probably okay, up to $2 trillion, …. but if it hits $2 trillion, I think the pushback from the bond market is going to be massive.”
“Fixed income markets aren’t likely to focus on deficits” for now, Rehling said, but how the debt ceiling discussion evolves will determine “if the market gets more spooked by deficits.”
Wells Fargo Investment Institute President Darrell Cronk added the deficit won’t have as big an impact as inflation. “Inflation surprising to the upside is a bigger concern.”
And while tariffs “could increase inflation,” Cronk said, “we don’t see it as a big derailer of economic growth.”
Although growth slows in 2025, Subadra Rajappa, Societe Generale head of U.S. rates strategy, expects inflation will moderate slowly, “especially as the focus shifts to tariffs and immigration with the incoming administration.”
The “new regime of tax cuts, tariffs, immigration, deregulation, and government efficiency … is bound to reshape both the U.S. and global economic landscape,” she said.
While she expects front-end yields to fall, with continued Fed easing, long-end yields rise in her base case, “although steep tariffs could have the opposite effect.”
The yield curve should steepen modestly, but “just like 2024, curve steepeners could remain a frustrating trade for investors in 2025,” Rajappa said.
There are many two-sided risks to the economy as a result of “policy unpredictability,” according to the BNP Paribas Markets 360 team.
“In our central case, U.S. growth settles into a soft landing in early 2025 before idling into 2026 as the impacts of import tariffs and immigration policies outweigh more pro-growth initiatives.”
Seema Shah, chief global strategist at Principal Asset Management, expects above-trend growth “at least in the first half of 2025.”
That’s based on household wealth near all-time highs, solid gains in equities and a strong overall corporate sector. “While the labor market showed worrying signs of weakness in the summer, more recent data paint a picture of strength,” Shah said. “Prospects for deregulation under the new administration provide an important boost to business sentiment, reinforcing the constructive backdrop for the jobs market.”
Lower interest rates, she said, would help “pockets of weakness. Yet, labor market resilience is rendering inflation’s path back to the Federal Reserve’s 2% target painfully slow and bumpy, and tariffs and restrictive immigration policies threaten a pick-up in price pressures in 2025. As such, a significant and aggressive monetary policy easing has become increasingly difficult to justify.”
University of Central Florida
Still, Snaith remains skeptical DOGE will accomplish much. “I suspect it will turn into a Beltway version of dodgeball, with the bureaucracy and its supporters frantically running around, trying to avoid getting hit by the ‘DOGE ball,'” he said. ” But in the end, most of the systems and spending will remain intact.”
The national debt “and the increasing burden of servicing that debt add to the air of uncertainty surrounding the U.S. economy’s outlook,” Snaith said. “Every trillion dollars in debt service is money that can’t be committed to infrastructure, helping the impoverished, healthcare for seniors or national defense — something has to change,” he added.
He expects real consumption spending will rise while growth slows to 2.7% in 2025. “From there, real GDP growth will drift downward hitting 1.8% in 2027.”
Wolters Kluwer’s Blue Chip Economic Indicators “raised its inflation outlook meaningfully,” and now projects core personal consumption expenditures “to average 2.5% in the four quarters of 2025, up from 2.2% in last month’s survey. Moreover, the panel estimates a 45% probability that inflation will accelerate further over the next six months, up from 37% last month.”
It also raised its GDP forecast by 0.4%-point from the first estimate in January.