Economic Outlook - March 2025
- The U.S. economy grew 2.8% in 2024, nearly matching the 2.9% growth achieved in 2023. A key driver of economic growth is consumer spending, accounting for nearly 70%. With unemployment at low levels and wage growth keeping pace with price increases, U.S. workers have the wherewithal to spend on both goods and services. Thus, our outlook is for the U.S. economy to continue to grow further in 2025, albeit at a slower rate than the previous two years. Our view is consistent with the current consensus forecast for 2025 U.S. GDP growth of 2.0%.
- Trade tariffs could prove to be an important factor influencing both U.S. economic growth and the outlook for inflation in 2025. Since being elected, President Donald Trump has consistently said that tariffs will be a cornerstone initiative. Recently, two of our largest trading partners, Canada and Mexico, received levies of 25% while U.S. imports from China saw a 20% tariff imposed. The European Union has also been mentioned. In addition, President Trump has suggested that if countries respond by imposing tariffs on U.S. goods, then reciprocal tariffs will be applied. However, the President has also occasionally softened his tone and even reversed some original decisions. The markets have thus far taken these pronouncements in stride under the belief that trade tariffs are more of a negotiating tactic by the President and that deals will be struck that will mitigate their impact.
- Inflation continues to moderate towards the Fed’s 2.0% target, but the rate of progress has been slow and uneven. The core Personal Consumption Expenditures Index (PCE), which excludes food and energy, rose at a 2.6% annual rate in January. This was a welcome decline after core PCE increased by 2.9% in December and 2.8% in November. The November and December figures had shown price increases to be accelerating from lower levels earlier in the fall. While it’s encouraging that inflation is no longer on an upward trend, trade tariffs represent a potential threat to further progress. Companies have indicated they expect to pass along tariff price increases to their customers.
- The Federal Reserve Open Market Committee (FOMC) will be facing some new dynamics as they deliberate at their next meeting on March 18 – 19. Trade tariffs may still be in the process of implementation, but the minutes from the January FOMC meeting reflect the concern that tariffs could play a role in creating an upside risk for inflation. For employment, recent data show that job gains have been consistent with a cooling labor market, but one where unemployment remains low. Layoffs are occurring but not on a scale that has been concerning. A new development is the proposed reduction in force in the federal government as the Trump administration seeks to cut government spending. In addition to the direct impact of government layoffs, private sector companies that support federal programs will also likely be affected. Given the cross currents, we foresee the FOMC emphasizing patience and leaving short-term interest rates unchanged at their March meeting.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Yardeni Research
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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