Kavan Choksi Talks

Kavan Choksi Talks About the Outlook for the United States Economy in 2025

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The United States economy continues to outperform other developed economies. Its real gross domestic product growth for 2024 is likely to reach 2.8. As Kavan Choksi points out, even with elevated interest rates, consumer spending has grown strongly in the country. There are several factors that have also supported aggregate consumer spending in the United States. These factors include stronger inflation-adjusted wage growth, a relatively tight labour market and a sharp increase in immigration. Business investment in the US has also held up quite well, majorly due to industrial policies that causes a sharp rise in factory construction.

Kavan Choksi discusses the United States economy outlook for 2025

The strong United States economy, along with a large federal deficit, has significantly supported government spending.  Personal consumption expenditures (PCE) is the preferred measure of inflation of the Federal Reserve. It has come down to 2.3% in October 2024 on a year-ago basis, from 2.8% in March 2024. Therefore, the Fed was able to lower the federal funds rate by 100 basis points between September and December 2024. Even though additional rate cuts are expected in 2025, the pace of those cuts is likely to be quite modest, owing to the persistence of services inflation. The mix of federal fiscal policy may also impact the pace of future rate cuts.

The federal economic policy would be among the largest uncertainties in the US economic outlook.  Many economists expect that many of the policies that were proposed by Trump during the presidential campaign shall not be implemented in their most maximalist forms. For instance, a gradual increase in tariff on select trading partners is expected, along with a modest rise in the deportations of immigrants who are undocumented. The Fed is expected to maintain its independence, and the provisions of the Tax Cuts and Jobs Act (TCJA) might be extended. Such a combination of policies should ideally enable real GDP to grow by 2.4% in 2025 prior to slowing to 1.7% in the year of 2026. Rising tariffs shall additionally encourage consumer spending and front-loading of imports. On a positive note, this may help boost consumer spending temporarily and raise business inventories.

As Kavan Choksi says, the positive impact of extending the Tax Cuts and Jobs Act or TCJA, and implementing deregulation are also likely to be felt closer to 2026. The extension of the TCJA shall have to undergo the typical legislative processes. This basically means that a deal is not likely to be made in the first half of the year. Companies may hold off large investments till there is better clarity in regard to the outcome of the tax bill. Deregulation may significantly help boost business investment, but it takes time for the implementation of such measures, as well as for businesses to react to them.

Overall, beyond the uncertain policy environment, the United States economic outlook remains fairly bright. Unemployment remains low, and inflation is nearing 2%. Therefore, the Fed may ease monetary policy at a modest pace. This should prevent a more protracted slowdown in the near term.

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