US Economy’s strong recovery and economic outlook: a look ahead

The US economy has demonstrated the strongest recovery from the COVID-19 pandemic among major developed nations, with annual inflation approaching the Federal Reserve’s target, robust consumer spending, record levels of factory investment, and a position as a net exporter of petroleum products. As a new administration prepares to take office in January, markets have reacted positively, fostering optimism about continued economic growth despite some uncertainty over policy implications. The economic outlook includes three primary scenarios: in the baseline scenario, real GDP growth is projected at 2.4% in 2025 and 1.7% in 2026, with anticipated tariffs on China and selective trade partners, moderate government spending cuts, and consumer spending growth of 3.1% in 2025; the tax cuts and deregulation scenario foresees an average GDP growth of 2.7% from 2025 to 2029, driven by investment boosts from tax rate reductions; conversely, the accelerated inflation scenario predicts a recession with significant tariffs leading to economic contraction, deportations reducing the population, and deep cuts in federal spending. Consumer spending has recently surged, with a 3.7% increase reported in Q3 2024, driven by durable goods demand, though projected rates of 2.8% in 2024 and 2.4% in 2025 will slow further in 2026. Interest rates are on a decline, expected to settle between 3.75% and 4% by the end of 2025, while inflation rates could rise as tariffs take effect, with CPI falling to 2.6% in October but likely to exceed 2% thereafter. Labor market dynamics may also shift due to higher rates of deportations, potentially reducing the labor force by 1.14 million by 2028. While the current economic performance remains strong, the landscape is marked by risks from proposed tariffs, immigration policies, and geopolitical tensions, which could challenge future growth prospects.

Source: Deloitte