at Calculated Risk on 12/22/2024 10:07:00 AM
Here is a review of the Ten Economic Questions for 2024.
Below are my ten questions for 2025 (I’ve been doing this online every year for 20 years!). These are just questions; I’ll follow up with some thoughts on each of these questions.
The purpose of these questions is to provide a framework of how the US economy will likely perform in 2025, and if there are surprises – like in 2020 with the pandemic – to adjust my thinking.
There is significant uncertainty as to fiscal and regulatory policy in 2025. There were many promises made during the campaign that obviously will not happen (deport 20 million people, no taxes on tips, overtime or Social Security benefits, 200% tariffs, and on and on).
We can assume the 2017 Tax Cuts and Jobs Act (TCJA) will be extended. That larger tariffs will be imposed on some imports, and there will be some deregulation. There is also the potential for significant policy mistakes, but for now I’m assuming any policy changes will not significantly impact the economy in 2025.
1) Economic growth: Economic growth was probably close to 2.8% in 2024 (around 2.6% Q4-over-Q4). The FOMC is expecting growth of 1.8% to 2.2% Q4-over-Q4 in 2025. How much will the economy grow in 2025? Will there be a recession in 2025?
2) Employment: Through November 2024, the economy added 2.0 million jobs in 2024. This is down from 3.0 million jobs added in 2023, 4.8 million in 2022, and 7.3 million in 2021 (2021 and 2022 were the two best years ever), but still a solid year for employment gains. How much will job growth slow in 2025? Or will the economy lose jobs?
3) Unemployment Rate: The unemployment rate was at 4.2% in November, up from 3.7% in November 2023. Currently the FOMC is projecting the unemployment rate will increase to the 4.2% to 4.5% range in Q4 2025. What will the unemployment rate be in December 2025?
4) Participation Rate: In November 2024, the overall participation rate was at 62.5%, down year-over-year from 62.8% in November 2023, and below the pre-pandemic level of 63.3% in February 2020. Long term, the BLS is projecting the overall participation rate will decline to 61.2% by 2033 due to demographics. What will the participation rate be in December 2025?
5) Inflation: Core PCE was up 2.8% YoY through November. This was down from a peak of 5.6% in early 2022. The FOMC is forecasting the YoY change in core PCE will be in the 2.5% to 2.7% range in Q4 2025. Will the core inflation rate decrease further in 2025, and what will the YoY core inflation rate be in December 2025?
6) Monetary Policy: The FOMC cut the federal funds rate four times in 2024 from “5-1/4 to 5-1/2 percent” at the beginning of 2024, to “4-1/4 to 4-1/2” at the end of the year. Most FOMC participants expect around two 25 bp rate cuts in 2025. What will the Fed Funds rate be in December 2025?
7) Wage Growth: Wage growth was solid in 2024, up 4.0% year-over-year as of November. How much will wages increase in 2025?
8) Residential Investment: Residential investment (RI) was slightly positive through the first three quarters of 2024. Through November, starts were down 4.3% year-to-date compared to the same period in 2023 (due to a sharp decline in multi-family starts). New home sales were up 2.1% year-to-date through October. Note: RI is mostly investment in new single-family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI change in 2025? How about housing starts and new home sales in 2025?
9) House Prices: It appears house prices – as measured by the national repeat sales index (Case-Shiller, FHFA, and Freddie Mac) – will be up 3% to 4% in 2024. What will happen with house prices in 2025?
10) Housing Inventory: Housing inventory decreased sharply during the pandemic to record lows in early 2022. Since then, inventory has increased but is still below pre-pandemic levels. Will inventory increase further in 2025?