The dangers of weaknesses for the American economy are stirring. The labor market is not as thoughtless as it once was: the degree of people who employ or rest their jobs remain below, where they stood in front of the pandemic, while the holidays were scoring. Beyond that, growth sources are narrowed, and the housing market is in stop. Changing political winds in Washington have also increased uncertainty in the view. All this adds a slower perspective for 2025 – even if many economists and analysts do not want to accept it.
To curb the worsening of the economy, the federal reserve would be forced to speed up facilitating its policy, supporting activity by lowering interest rates more aggressively than its members or investors currently anticipated. Based on the probabilities infused by markets, investors are waiting to see two cuts from the FED in 2025.
After years of warning that a collision was just about the corner, economists and analysts of Wall Street have largely abandoned the idea of a recession or a significant slowdown in the US. But while the essential parts of the slow engine and the Fed sits again and does nothing, the chances of a significantly weaker economy are growing.
Anydo reasonable reading of data shows a clear cooling of the US economy. Of course, GDP growth in 2024 entered a 2.5% respectable, but this is up from 3% to 2023. And the way the US reached that growth was not particularly encouraging. Household consumption and government investment account for the lion’s growth part last year, while private internal internal investments – which traces companies that came in their businesses and the amount spent on building new homes, apartments and other structures – was a modest crawling. Given the narrow composition of growth, it is reasonable that if consumer spending and moderate government investments, the economy will also. The case for a slowdown in both categories is strong.
Consumption view depends on income – people can spend more money only if they have more money to come. And it is clear that income growth is being relieved while labor markets are invited. The percentage of people abandoning their work hit fresh landing at the end of 2024, and while it ceases, as well as the increase in salaries. It makes sense: when workers are less likely to quit their jobs, employers feel less needed to give them ups to keep them around, which shifts power from employees to employers. And while the income is slow, so will consumption. In fact, we have already seen some of this decline: revenues regulated by net inflation of transfer payments-a representative for payments of people with government payments such as social security and naked medicaid-a full percentage point under consumption. At the same time, the rate of personal savings (a percentage measure that people are setting aside) fell to 3.8% from 4.4% to 2023, suggesting that Americans are plunging into their reserves to continue costs. But there is a limit on how much consumers can withdraw their savings to buy the purchase.
The other pillar of the US growth, government spending, is also showing signs of strain – and is not just from Doge cuts protected by Elon Musk. The states received large growth of cash during the pandemic years, but those surplus are rapidly fading. State and local government construction costs increased 4.4% to 2024, from 19.7% to 2023. Employment by state and local governments is also being reduced. A recent report from Pew said: “State budgets are expected to shrink significantly in fiscal year 2025 after the post-fandemic revenue growth era, record costs and historical tax cuts approaches. States on June 30.”
Even the costs of new housing, one of the weakest components of GDP from last year, has been raised for a worse 2025. Interest rates remain raised while income is slow, creating a affordability problem that makes it harder for people to buy a home and put pressure high on the number of homes sitting in the market, as it takes more time for sellers to find a buyer. Redfin recently said: “Including in new lists, along with slow sales, is contributing to a growing supply group for home buyers to choose.
This growth slowdown would have serious consequences for Americans. A clear weakness is a possible increase in the number of people outside of work. Despite strong growth in both 2023 and 2024, the unemployment rate still increased 0.3 percentage points in each of those years. If the growth is likely to slow down in 2025, it is not a fierce jump to assume that unemployment will continue to increase. If there is more clumsy in the labor market, it is not difficult to see income that slows down and a loop of negative reactions starting, weighing home expenses and other parts of the economy.
There are, of course, the way to whitewash or even avoid some of the worst impacts of this slowdown. One of the most important ways to support the economy is for the Fed to start lowering interest rates. Making cheaper debt would encourage businesses to invest or hire while providing some pillows for household balances.
After all, the Fed was already overthrowing its main rate last year in an attempt to get before a deeper slowdown in the labor market. And the reason that the increased rates of the FED in the first place-inflation-but also shows constant signs of progress towards the purpose of the central bank by 2% increase year by year. While the most recent reading of the consumer price index was slightly hotter than expected, the FED’s favorite personal consumption inflation meter, the Fed Inflation Inflation Measure has given us better news. Inflation Core PCE, which is more reliable because it has a much larger stretch than CPI Core, returned to the right track in November and December after two discouraging months. Most of the lack of basic inflation, in relation to the FED’s target, is in the housing. Given the aforementioned slowdown of price increases in the housing market, it is reasonable that this will continue to be facilitated.
Instead of continuing its rates, however, the Fed has changed the course, preferring a more reactive approach to data on the chance of inflation surprises us by rising up. It is now insanity to expect permission from the data before moving the norms as it increases the chance to fall back, but the reason for the FED’s concerns about increasing inflation makes sense less because it is clear that this comes down to speculation about what the new administration can do.
Immediately after the election, Fed Chairman Jerome Powell was quite clear when asked about the entry administration policies. “We don’t think, we don’t speculate and don’t assume,” Powell told reporters. A month later, Powell seemed to have changed his melody.
“Some people took a very preliminary step and began to include very conditional assessments of the economic effects of policies in their forecast at the meeting and said at the meeting,” he said during a press conference after the Fed December meeting. In other words, they think, speculate and assume. How suitable!
Let me turn to the elephant in the room: Donald Trump. In recent weeks, many business economists have highlighted the uncertainty that comes from his administration, citing his chaotic approach to trade policy. The threats of the ongoing tariffs, for again, are said to raise business investments, and if implemented, they can push inflation again. This is, I think, the source of the Powell’s waiting and viewing pivot. But the evidence of a real effect on the president’s policies is weak so far.
There is always an uncertainty when power changes hands in Washington. Consider the alternative. Had Kamala Harris win the election, there would be much more doubt if the 2017 tax cut, which would expire at the end of the year, would be extended or if tax rates would increase for families and businesses. If corporate taxes were to increase at the end of the year, a wide research body suggests that those increased taxes are likely to be passed on to consumers. Does anyone seriously think that the Fed would worry about the risks up to the inflation from the corporate tax switch? No, the Fed is likely to look at the lowering of interest rates as a way to curb any risks of decreasing growth from decreasing costs and investments. This is exactly why it is so irresponsible to prejudice the results. Follow the data, compared to speculation on a series of policies that may not come into force.
For me, it is clear that businesses are ready to give the new administration the benefit of doubt. Fees are not the only dimension of politics. Perhaps firms are ready to tolerate some short -term uncertainty about tariffs if it means an improved regulatory and tax background down the road. Of course, there is enthusiasm, for example, for an easier touch of financial regulation.
Trump is also not the only source of uncertainty. If the Congress falls on the ball for legislation, faith can stagnate, especially if the faith is preached in the act of lowering taxes and the work that extends at the end of the year. This would be a much greater risk to the economic point of view than the threat of tariffs. The scenario of the weaknesses here is clear: nothing of the substance happens, at least not immediately, from Congress or Trump, but the Fed, because it is concerned about potential policies, decides to stop doing anything as nominal growth continues to slow down. This would be a passive monetary policy coercion, which has important implications for financial market investors. I predict a decline in long -term interest rates and a sale of net capital prices while the risk appetite fades. For the economy, expect conditions to worsen in the labor market.
Fed will eventually come around, lowering the rates to support growth, but if you are waiting for the bad news to be visible before doing something, there is usually a way to appear.
Neil Dutta He is chief of economics in the Renaissance Macro Research.