Nov 25 2024: J.P. Morgan’s 2025 U.S. economic forecast presents two possible scenarios for the nation’s economy, contingent on the policy direction under the newly elected administration.
The analysis highlights the tension between stimulus-driven policy changes and the uncertainty surrounding trade and regulation. The report includes projections for key economic indicators such as GDP growth, unemployment trends, inflation, and the effects of fiscal and monetary policies.
J.P. Morgan suggests that the recent election, which ushered in a red-wave administration, creates a bifurcated outlook for 2025. On one side, tax cuts and deregulation could stimulate business confidence, improve productivity, and boost GDP growth while keeping inflation in check. On the other, rising policy uncertainties—such as tariffs, restrictive immigration policies, and potential geopolitical tensions—could lead to a stagflationary environment marked by slower growth and higher inflation.
The bank forecasts a modest slowdown in GDP growth to 2% in 2025, with a slight rise in unemployment to 4.5%. Despite this cooling, the business cycle remains resilient, with gradual easing of labor market tightness.
Job growth is expected to be subdued, with layoffs remaining low. However, reduced immigration could limit labor supply and growth in key sectors. Wage growth is projected to decelerate to the low 3% range by the second half of the year, which, along with modest productivity gains, suggests real compensation growth will still support consumer spending, albeit at a slower pace.
Core PCE inflation, the Federal Reserve’s preferred measure, is expected to decrease to 2.3% by year-end, approaching the Fed’s 2% target. However, inflationary pressures from tariffs on Chinese imports could present risks. A potential 60% tariff on Chinese goods could push core inflation up by 0.2 percentage points, although the broader effect on price stability remains uncertain.
The Federal Reserve is projected to ease monetary policy, with gradual rate cuts throughout 2025. By September, the Fed funds target rate is expected to stabilize between 3.5-3.75%, reflecting cautious optimism about managing inflation without harming employment.
Trade policy remains a critical factor in the 2025 outlook. Analysts anticipate that new tariffs on China will disrupt trade flows, dampen U.S. export growth, and increase costs for imports. The possibility of additional tariff measures targeting global trade further adds to the uncertainty.
On the fiscal front, the report expects significant expansion in federal deficits. The likely extension of 2017’s Tax Cuts and Jobs Act provisions, coupled with increased defense and domestic spending, could push the deficit to 7% of GDP by 2026. This poses concerns in an environment of full employment and slow GDP growth.
Corporate investment is expected to grow modestly, supported by consumer demand and federal incentives for infrastructure and technology sectors. However, analysts note that business spending will remain cautious, with companies prioritizing balance sheet stability over expansion.
Real consumer spending, a key driver of economic activity, is forecasted to grow at a slower pace of 2% in 2025. Moderating wage growth, tighter credit conditions, and reduced household savings are likely to temper consumption.
