The five major trends in the USA's economy and financial markets for 2025 remain employment, consumer, growth, inflation, and interest rates. The USA's economic performance in 2024 is robust, providing reasons to maintain an optimistic outlook for 2025.

Trends in the labor market and employment outlook.

The USA's labor market presents a complex situation in 2024. Non-farm employment growth has slowed, and the unemployment rate has risen compared to 2023. However, the current state of the labor market is more positive than these two data indicators suggest.

Although net job growth has slowed in 2024, there has been no contraction since December 2020. Furthermore, despite the rise in the unemployment rate in 2024, it remains low at 4.2% in November 2024.

In addition to job numbers and unemployment rates, the weekly initial claims for unemployment benefits in December 2024 have been very low, with over 7.7 million job vacancies in October 2024, which will be a historical high except for the COVID-19 pandemic period.

Although employment growth may further slow in 2025, given the large number of job vacancies in the USA's economy and other positive labor market data providing favorable factors for the coming year, the likelihood of significant contractions in monthly job creation seems low.

In short, the USA's labor market remains solid as it enters 2025.

Consumer Trends and Outlook

Driven by a strong labor market and rising wages, consumption in the USA has remained robust, and it may maintain a positive trend in 2025. Recent spending data shows favorable results, while consumer Crediting data indicates that consumers and households are relatively well off.

According to data from the USA Census Bureau, retail sales in the USA increased by 4.1% year-on-year in November 2024. Additionally, personal consumption expenditures grew by 5.5% year-on-year in November 2024, based on data from the USA Bureau of Economic Analysis.

Strong spending from de-leveraging consumers supported growth in 2024 and provided good signs for 2025.

The New York Fed's report on USA household debt and Crediting for the third quarter of 2024 shows that consumer debt in the USA reached a record 17.94 trillion USD. However, the report also indicates a low debt delinquency rate, accounting for only 3.5% of total consumer debt. Before the third quarter of 2020, a 3.5% consumer debt delinquency rate would have been a historic low.

In the third quarter of 2024, the USA's total consumer debt-to-income ratio was relatively low at 82%, which is the lowest debt-to-income ratio since 2002, except during the COVID-19 pandemic.

The USA is also in a particularly favorable position regarding mortgage debt. Since the first quarter of 2020, nearly 68% of mortgage loans have been issued to individuals with credit scores above 760, which is the highest tier of credit scoring.

Mortgage data is particularly striking as it highlights that individuals with historically the highest credit quality are borrowing at some of the lowest rates on record, combined with low debt delinquency rates and a strong labor market, suggesting that strong consumer spending is likely to continue.

Growth Trends and Outlook

According to the International Monetary Fund (IMF) forecast, the actual GDP growth rate in the USA in 2024 may be higher than in 2023. Moreover, based on data from Prestige Economics, the USA's GDP growth rate in 2024 might become the fastest among all developed economies for the second consecutive year.

Looking ahead to 2025, the GDP outlook for the USA remains positive, although growth rates may slow down.

Recent USA growth data support a positive outlook, as the actual GDP accelerated to a revised 3.1% in the third quarter of 2024, up from a robust 3.0% growth rate in the second quarter. In the short term, the outlook is positive, with Atlanta Fed's GDPNow data indicating that as of December 20, the projected GDP growth rate for the USA in the fourth quarter of 2024 may be 3.1%.

Approximately 69% of the GDP in the third quarter of 2024 comes from Consumer spending, which is why record non-farm employment, a large number of job vacancies, and low rates of consumer debt delinquency are supporting growth in 2024, and why they also bring favorable signs for the growth outlook in the USA for 2025.

Consumer Inflation Trends and Outlook

The year-on-year CPI inflation rate in 2024 is expected to decline compared to 2023, and looking ahead to 2025, based on the moderate month-on-month inflation in recent reports, CPI inflation may further ease.

The current CPI inflation rate is well above the Federal Reserve's target of 2%, however, according to data from Prestige Economics, due to base effects, the year-on-year growth rate of CPI in the second quarter of 2025 may decline. Furthermore, the average year-on-year growth rate of most Consumer inflation indicators may be lower in 2025 than in 2024.

Interest Rate Trends and Outlook

According to the December Federal Open Market Committee (FOMC) forecast, the federal funds rate is expected to decline starting in 2024, and the Federal Reserve will further cut rates in 2025.

Following the Federal Reserve's rate cut in December and the FOMC forecast, the market anticipates that the Federal Reserve will not cut rates in January next year. However, the FOMC forecast still indicates that the Federal Reserve may make two cuts of 25 basis points in 2025.

The FOMC's forecasts often differ significantly from actual conditions, and the Federal Reserve may cut rates by more than 0.5% in 2025.

Financial professionals like to say, 'The trend is your friend,' even if the trend is not overly positive. Fortunately, in 2024, the trend is relatively positive, including continued net job growth, robust Consumer activity, positive growth, easing inflation, and declining interest rates. The outlook for 2025 includes many of the same factors and favorable elements as early 2024.

Of course, there are also adverse risks in the outlook, especially political and geopolitical risks. However, these risks also weigh heavily on the 2024 outlook, and 2024 is set to conclude strongly for the economy and stock market.

A persistently strong labor market may support Consumer spending and growth in 2025, while declining interest rates may open the door for further cuts by the Federal Reserve.

The market has priced in the FOMC's forecast of only two rate cuts of 25 basis points in 2025; any additional cuts may put pressure on the dollar and U.S. bond yields while supporting stock and bond prices.

Despite the latest FOMC predictions, Prestige Economics expects the Federal Reserve to cut interest rates at least three times in 2025, with the next cut occurring before or during the Federal Reserve meeting in May 2025.

Editor/Rocky