Economic trends for 2025 and beyond

To project into the future, we must first understand the past. Much of the last year’s narrative has been about the Federal Reserve trying to cool inflation. Its root cause was certainly formulaic — part short-term reaction to supply chain shocks rooted in the pandemic, and some in the form of fiscal stimulus. The correlation between federal spending and the consumer price index is clear.

Federal Deficit and CPI

Source: Federal Reserve Bank

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2025 Forecast

Now that our economy has cycled through much of the payroll-related stimulus, a new narrative is emerging. In a recent poll of North American executives, 84% cited geopolitics and transfer of power as the greatest risks to the U.S. economy. In other words, our economy has normalized to a point where the greatest risks no longer lie within.

Most economists predict a slowing of growth in 2025 in the 2% range. Economists, however, have consistently underestimated GDP growth over the last few quarters. A contradiction in our economy is the Fed moving towards lower rates at a time when many of the President-elect’s policies, such as higher tariffs and lower taxes, are inflationary. Higher Inflation and debt would prompt higher interest rates.

Projected Growth of GDP

Sources: Federal Reserve, CBO

Impact of the debt cycle

The trajectory of U.S. debt is reaching a point of no return. Short of a miraculous consensus among political parties leading to deficit reform, U.S. debt will exceed 120% of GDP by 2030. For years, economists have warned of the dire consequence of too much leverage — crowding of investment. As U.S. bonds become riskier, higher bond yields will promote higher interest rates, slower growth and higher inflation.

While returning to 6% inflation in the near term is unlikely, the Fed will be under pressure to balance its dual mandate of managing unemployment and inflation — because the inflation will already be baked in.

In the long term, this could lead to a collapse and massive deleveraging, which would actually be deflationary (and much worse).

U.S. Federal Debt

Source: International Monetary Fund 

The Fed is also working within a global marketplace. According to its dot plot graph, the Federal Funds Rate is expected to reduce by about 150 basis points to the 3.75-4.00% level by the end of 2025. But part of its calculus is global rates, which range from the Bank of Japan (around zero) to the Bank of Russia (whose rate, at times, has exceeded 15%).

Global Central Bank Rates

Source: BIS Data Portal

U.S. manufacturing and tariffs

Global manufacturing output is expected to grow marginally in 2025 and rise in 2026. This puts pressure on U.S. manufacturers operating in a zero-sum commoditized environment.

Global Manufacturing Output

Source: Interact Analysis

The Biden-Harris Administration has held serve on most Trump-era tax cuts. Total imports are down slightly, but volumes have flowed from goods, which have tariffs to those that have none. Most notably, there will be a 100% tariff on Chinese EV imports, which cost a fraction of U.S. EVs. The U.S. auto market faces ballooning costs coming out of difficult labor negotiations.

The President-elect has proposed a 10% tariff on all imports and 60% on Chinese imports, but many believe his trade stance to be a negotiation ploy. Also, a higher dollar would mitigate any tariffs.

Changes to Chinese Tariffs

Source: Talk Markets

Sunsetting taxes

Business owners considering an exit should monitor the progress of the Tax Cuts and Jobs Act (TCJA). Unless Congress acts, it will sunset in 2026, resulting in a tax increase for most high-income wage earners. Congress is expected to renew the legislation.

Mergers & Acquisitions

Deal flow has largely returned (numbers below are YTD), but EBITDA multiples remain flat. The average EBITDA multiple is at 7.1x, with companies with over $250 million in enterprise value fetching closer to 10x.

Values are lower in part because the high cost of capital has kept private equity at bay. Today, PE firms have $2.6 trillion in dry powder compared to $2.2 trillion in 2021. With PE largely on the sideline, sellers must rely more on strategic buyers to complete deals.

Multiples and Deal Flow

Source: Forvis Mazars

Key sector growth

A fundamental shift in the U.S. economy contributed to GDP growth. High-growth sectors such as health care and tech eclipsed traditional sectors like construction and manufacturing.

Energy costs are stable for the moment, but the ongoing conflict in the Middle East threatens to raise oil prices.

Sector Growth

Source: Bureau of Economic Analysis

U.S. real estate is poised for a bounce-back given lower interest rates. Mortgage rates do not correspond dollar-for-dollar with changes to the Federal Funds Rate, and bank spreads fluctuate.

Yet, housing starts are projected to rise next year, providing relief to strong demand. Cities are struggling to add affordable housing units fast enough given the high cost of real estate, development and pushback in some communities. Fannie Mae projects multifamily starts to slow in the first two quarters of 2025, as developers struggle with labor and occupancy within buildings that many can’t afford.

Lower rates will provide needed relief to a depressed commercial real estate market.

U.S. Housing Starts

Source: National Association of Realtors

Final thoughts

Overall, the U.S. economy should be less volatile in 2025. Inflation will be in check, wages will be strong, and consumers are spending. This is the time for business owners to make hay. The next few years should provide more relative stability than the period that will follow.

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