
What will the economy look like in 2025? That is the great question that faces us. After two years of robust employment, strong growth, and stubborn but moderating inflation, we find ourselves asking if the trends we have seen can continue or if we are on course for a shift in direction. As of today, our collective view is that we are likely to see economic trends moderate from their previous pace and enter a more stable period. There are, however, a handful of looming events that could upend our current view.
The employment picture was very resilient during 2024. The unemployment rate increased from 3.7% to 4.2% (November 2024), reflecting a slightly cooling job market after the surge in employment post-pandemic. While the upward trend in unemployment is something we are keeping an eye on, the fact that the increase was moderate in an era of tight monetary policy was a positive in our view. Stable labor markets are part of the Federal Reserve’s dual mandate, and we believe that keeping unemployment around the 4% mark during the battle against inflation is a win. Whether or not the Fed can keep unemployment at this level in the coming year is one of the great unknowns. Our initial view is that the Fed should be able to keep the labor market in balance. Earlier this week, we got an indication from the stronger-than-expected job openings data, and we will get final unemployment data for 2024 in the next few days. This new information seems to point toward a relatively steady outlook for now.
While unemployment seems like a smaller unknown today, inflation feels like the great unknown. After moderating for much of the year, the pace of price increases seems to have stalled out. More unsettling is the fact that it has stalled out at a level above the Fed’s long-term target of 2%. As of November, Headline CPI was 2.7%, and Core CPI was 3.3% (for the preceding 12 months). The Fed has remained confident that a number of the factors keeping inflation elevated will continue to fade as we head into the new year, but in their most recent Summary of Economic Projections, they themselves indicated that inflation may not come down to their targets as quickly as hoped. As a result, they also brought down the number of expected rate cuts for 2025. We view stickier inflation as the true unknown for 2025. While we are not anticipating a reacceleration of inflation given current macroeconomic conditions, recent experience shows that unexpected global events like geopolitics, pandemics, and supply chain entanglements can unexpectedly drive inflation. Our base case remains for inflation to moderate in 2025, but the risk of outlier events cannot be underestimated, as is always the case.
If inflation remains sticky, it will likely coincide with growth remaining healthy in 2025. At the end of January, we will get our first look at GDP growth for Q4 2024. The Atlanta Federal Reserve is projecting +2.7% (January 7, 2025) annualized growth for the quarter. This robust growth comes on the back of a very strong growth of +3.1% and +3.0% in Q3 and Q2 of 2024. Throughout 2024, GDP growth was more resilient than expected. GDP may moderate in 2025, but we don’t anticipate a rapid deceleration as employed consumers and healthy corporations will likely sustain near 2% growth for the year. Risks to this outlook include a delayed effect from the current level of interest rates, geopolitical uncertainty, and the pace of inflation, none of which can be known for certain.
Looking into 2025, the current outlook is one of sustained unemployment, moderating inflation, and steady growth. If the economic picture were to follow this script, there would likely be few complaints. However, the past several years have taught us that there will inevitably be some economic twist that is not fully anticipated or priced into markets. As we step into the unknown, we take the lessons of the past into consideration by being precise in our portfolio construction and risk management processes. We will continue to focus on the data behind the headlines and continue to maintain our bias toward high-quality cash flow-generating equities, stable fixed income, and diversifying alternative investments.
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