On December 18^th, the Federal Reserve announced its third interest rate cut of the year. The quarter-point drop moves the benchmark lending rate to a range of 4.25% to 4.50%. This interest rate cut sent markets plummeting, with the Nasdaq dropping two and a half points in just 24 hours.

But the volatile marketplace doesn’t tell the whole story. When looking at the economy over a longer period, we see something a bit different. Let’s see how the US economy has performed in the last few years and discuss how this could impact your business as we head into 2025.

Post-COVID soft landing?

Some argue that the US has finally achieved what economists call a “soft landing”. After more than two years of volatility following the COVID-19 pandemic, inflation still remains slightly above the 2% target (as referenced below) and prices have receded.

The Fed has a long-standing goal to keep inflation at 2%, and with the two interest rate cuts it plans to announce in 2025, it stands a chance at meeting that goal sometime next year.[1]

[1] https://www.cnn.com/2024/12/18/economy/fed-rate-decision-december/index.html

New administration breeds uncertainty

We’ve averted a full-blown recession, but that doesn’t mean we’re out of the clear. We should anticipate some economic upheaval in early 2025. As with all presidential transitions, the marketplace is going to shift and adjust to new legislation. President Trump has pledged to:

• Enforce tariffs (which could impact inflation and consumer prices)
• Cut taxes (which could increase the Federal debt and boost interest costs)
• Cut federal spending (which could compensate for tax cuts but cause a drag on economic activity)

There is so much we don’t know about the incoming Administration’s plans and timetable. We also don’t know how foreign allies and adversaries will respond, or how domestic economic actors will adapt. But there are plenty of things we do know, which is information you can use to help your business thrive even when the future of our economy is uncertain.

Trade policy

For decades, US gross domestic purchases have outpaced US gross domestic product. Because our nation purchases more than it produces, we rely heavily on imports.

President Trump wants to lessen our reliance on imported goods, and tariffs are his solution. Some of the possible outcomes of this move are:

• Tariffs will boost demand for domestically produced goods, which could raise prices for consumers.
• Foreign producers will lower prices of products entering the US so that the demand and price for imported goods stays the same.
• The price of imported goods will rise and then be passed onto the consumer.

Tariff policies may sound simple, but the implications are anything but. We anticipate President Trump’s tariff agenda will be pushed off the ground quickly, so time will soon tell how his tariff policies play out.

Labor markets

Let’s review some of the trends we’re seeing in the labor market.

• The unemployment rate is down: In response to COVID-era stimulus, unemployment claims began to fall. Reports now show that employment turnover has returned to normal.
• Total employment is up: Total employment has surpassed its pre-COVID levels, but when controlled for the population, it hasn’t quite recovered.
• Ohio employment numbers lag behind national levels: Employment in the US has resumed its pre-pandemic trajectory, but Ohio’s growth rate lags behind national levels, as it has for years. In manufacturing, the gap between Ohio’s employment figures is even more pronounced.

• Unemployment rates are still lower for college graduates: Unemployment rates skyrocketed following the pandemic, especially for those with no college degree. Employment in both categories (college graduates and non-college graduates) is improving, but the labor market still favors college grads.

Consumer sentiment

Over the last 20 years, consumer sentiment has been inversely correlated with the unemployment rate. As more people find employment, consumer sentiment rises. But something happened in 2020. After the pandemic, consumer sentiment has flipped relative to the unemployment rate.

If the economy is strong, inflation is under control, and people are able to find jobs, why is consumer sentiment so low? Here are a few reasons:

• Prices of consumer goods are high: Even though inflation has gotten under control, prices have continued to rise. Without a recession forcing prices to drop again, those high prices are likely here to stay. While some Americans’ earnings have kept up with the new prices, others haven’t been as lucky.

• Housing is more expensive: Home owners have seen their assets appreciate in value over the past few years, but those looking to enter the housing market today are facing high prices and high mortgage rates.

• Small businesses are struggling: The National Federation of Independent Business publishes an Optimism Index based on a variety of factors, like a business’s plan to:
  • Make capital outlays
  • Increase inventories
  • Increase employment
  • Expand into new markets

The Optimism Index has been trending down since COVID, showing that small businesses have been more and more pessimistic about the future.

Things to look out for

Economic policy changes are imminent. Early next year, when the new Administration takes office, we’ll see exactly what those changes are. But tax policy changes are also on their way. President Trump has mentioned some of the following:

• Lowering the corporate tax rate (from its current 21% down to as low as 15%)
• Making the 20% pass-through business deduction permanent
• Restoring bonus depreciation to 100%
• Reinstating unlimited deductions for state and local taxes
• Exempting social security benefits and tip income from taxation
• Expanding the child tax credit
• Eliminating green energy subsidies from the IRA
• Creating a tax credit for family caregivers

We’ll have more details about these changes once legislation gets drafted. If you want up-to-date information about these tax law changes and other legislative changes, contact us today.