2025 Market Outlook: Analyzing Potential Policy Impacts
In our December 2024 Market Pulse webinar, Dr. Robert Wescott of Wescott Strategic Advisors presented a macroeconomic update that focused on the potential outlook for the American economy under the incoming presidential administration of President Donald Trump that began January 20th.¹
Economic Performance in 2024 and Economic Potential in 2025
The dynamics of the ever changing political environment can create uncertainty both domestically and globally. The U.S. has far outperformed other G7 countries since the Covid-19 pandemic, with 12% GDP growth since the end of 2019. American economic growth in 2024 and its potential for further growth in 2025 can be attributed to a healthy labor market (with 2024 having one of the lowest unemployment rates in the last fifty years), rising household wealth (up $8.4 trillion over the past four quarters), and higher consumer spending (up $1.562 trillion). These trends suggest steady economic growth in 2025 under the current economic policy trajectory.
Potential Policy Impacts on the 2025 Economic Outlook
Early indicators suggest increased economic optimism, especially among Republicans, following the election. The stock market, reflecting this sentiment, saw a roughly $5 trillion increase in wealth between the end of June and early December 2024. However, uncertainty remains regarding how the new administration will implement changes. Four key policy areas – taxes and debt, immigration and deportation, tariffs, and institutional control – could significantly influence the 2025 economic outlook.
Taxes and Debt
President-Elect Trump’s proposed policies on government spending and taxes could substantially increase the federal deficit, potentially by over $9 trillion over the next decade. Proposed changes range from eliminating taxes on social security, overtime, and tips to lowering the corporate income tax rate from 21% to 15%. While tax cuts and deregulation could stimulate some private business growth, they could also increase interest rates and hinder economic growth.
Here are some possibilities:
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Little Implementation: The administration could extend most 2017 Tax Cuts and Jobs Act tax cuts, restore expensing and R&D credits, and maintain taxes on overtime, tips, and social security. This scenario, coupled with spending cuts to programs like Medicaid and SNAP, could have a positive GDP impact due to continued tax boosts.
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Light Implementation: The administration might extend 2017 tax cuts, cut the corporate tax rate to 15%, and implement minor cuts to other income sources. With limited cuts to social programs and few spending cuts, the deficit would widen. This scenario could result in a negative GDP impact, with short-term growth from tax cuts offset by concerns about unsustainable budget deficits and moderate interest rate increases, hurting medium-term growth.
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Heavy Implementation: The administration could enact all promised tax cuts, including eliminating taxes on overtime, tips, and social security, and restore SALT deductions. With limited spending cuts, deficits would rise sharply, and interest rates would jump. This scenario could negatively impact the GDP. While lower taxes might boost short-term growth, rising debt could lead to higher interest rates, hindering investment spending. The dollar would also rise, hurting American exports.
Tariffs
Tariff implementation raises concerns about retaliation, something history has demonstrated can certainly be on the table. The 1930 Smoot-Hawley Act imposed 20% tariffs and led to retaliation from 24 countries. The level and targets of proposed tariffs will determine their impact:
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Little Implementation: Implementing very few tariffs, particularly if targeting only China, could have minimal or negligible GDP and inflation impacts, although price increases could be noticeable in specific sectors.
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Light Implementation: Implementing 10% across-the-board tariffs and 60% on China, with exceptions, would likely have more noticeable effects, including retaliatory actions, negative GDP impacts (depending on the extent of exceptions), and price increases on various goods.
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Heavy Implementation: Implementing 20% across-the-board tariffs and 60% to 200% on specific countries like China and Mexico could lead to widespread retaliatory tariffs, significantly impacting GDP, potentially triggering a recession and impacting global company valuations. Substantial price increases on many goods could add 3-5 percentage points to inflation for a few years.
Presidential Influence
President Trump has expressed interest in influencing monetary policy. Studies suggest that increased political involvement in monetary policy is correlated with higher inflation.
Presidents and Prime Ministers often seek to lower interest rates for re-election. With re-election no longer a factor, the President’s actions are uncertain. Pressuring the Federal Reserve to cut interest rates might provide short-term growth within 3 to 6 months, but could negatively impact inflation within 6 to 18 months.
Source:
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Dr. Robert Wescott, President, Wescott Strategic Advisors, 2024 - December 2024 Market Pulse Webinar
*The opinions, estimates, and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.