2025 economic outlook
Around this time a year ago, there was a lot of discussion about inflation and interest rates, and whether or not our economy was heading for a “soft landing.” With these concerns in mind, 2024 wasn’t without some significant positive metrics. The U.S. economy saw an increase in real household income, a rise in consumer spending, and a better than expected job market.
Inflation and interest rates will continue to draw attention in 2025, as well as the implications of a new administration and Congress. As we look towards the new year ahead in the latest Sharing Knowledge Series episode, host Kevin Vonderau, EVP, chief lending officer at Westfield Bank leads a discussion about where our economy is at and what business owners can expect in the coming months.
Kevin is joined by Jon Shulman, a Westfield Bank board member, and Brian Toma, CFP®, AIF®, CEPA®, managing partner and financial advisor at FHT Advisors. You can watch or listen to the full episode below.
Policy changes in 2025
In recent years, the Federal Reserve has been implementing quantitative easing, a monetary policy tool used by the central bank to increase money supply and lower interest rates. Jon points out that we’re now starting to see the Fed reverse this policy and turn towards pro-investment policies. While interest rates are trending down, business owners and consumers shouldn’t count on them reaching near-zero levels in 2025.
Outside of decisions made by the Fed, regulatory policy is something to keep an eye on. Brian expects the new administration to rollback business and industry regulations, which he believes will help grow the economy.
The latest inflation trends
There’s good and bad news when it comes to the state of inflation. The good news is that recent rates of inflation are significantly lower than compared to two years ago (2.7 percent in November 2024 vs. 9.1 percent in June 2022.) The bad news is that this still means that prices are rising, just not as fast as they once were. Whether it’s the price of ordering a pizza or hiring a plumber, consumers and business owners shouldn’t expect prices to return to where they once were. In particular, the cost of services is rising the most, likely as a result of rising wages.
Tariffs as a negotiating tool
It’s Brian’s hope that tariffs are used for negotiating purposes with a focus on goods and services that are made in the U.S. If used effectively, tariffs can be a significant boost to American companies and industries that make the protected products. On the other hand, it doesn’t make as much sense to apply tariffs to goods that aren’t produced domestically.
A consumer driven economy
As Jon notes, 70 percent of the nation’s gross domestic product comes from consumer spending, suggesting that consumer activity is a major driver of the direction of our economy. While inflation persists, it’s possible that a more business friendly environment will lead to greater consumer confidence over the next year. And while interest rates might not feel low right now given where things were a few years ago, historically speaking, they are certainly on the lower end of the spectrum. Given this context, 2025 might be relatively favorable for taking on big investments, such as business expansion or home buying. Brian points out that presidential election years, regardless of which party wins, tend to result in positive stock market trends over the following year.
Key indicators to watch in 2025
Predictions about the economy are far from a guarantee, but there are some key indicators that Jon and Brian recommend following in the new year to gauge the economic forecast. These include:
- Reports from lenders on credit card and auto loan delinquency rates, which give an indication of overall consumer credit quality
- Asset bubbles where prices have risen significantly
- Deficits at the federal government level
- Manufacturing productivity (ISM index)
- Rates of employed individuals, manufacturing wages, and job openings
No matter what the year ahead has in store, having a team of trusted advisors around you should always be a priority. As you navigate the changing economic landscape, being able to turn to a financial advisor, a banker, a CPA, an attorney, and other trusted professionals, is vital.
The new year is also a good time to create or revisit a budget, both on a personal and business level. You can use these budgets to inform contingency plans as it relates to the impacts of factors like inflation or interest rate changes.
