🔒Managing expectations for 2025

2024 was the year of resiliency. 

At the beginning of 2024, the economic outlook was “cautiously optimistic,” with market forecasts calling for a slowing economy and GDP growth in the 1% to 1.5% range. 

It turns out the economy fared much better. Over the last four quarters ending Sept. 30, GDP growth has averaged 2.65%. 

Concerns for a weakening labor market never materialized. The unemployment rate did “soften” from 3.5% to 4.2% over the year. But 4.2% unemployment is historically strong and typically considered full employment. 

Inflation continued to trend lower throughout the year, allowing the Federal Reserve to begin lowering interest rates in September. 

Lastly, the stock market, as measured by the S&P 500, increased 23.3% in 2024. These are remarkable results considering the muted expectations entering the year. 

This will be a tough act to follow.

However, the strong national economic statistics are a bit misleading when one looks at the Hartford economy and its major sectors. 

Economic growth was not uniform across the economy, particularly for small businesses that dominate the Greater Hartford economy. That’s according to Hartford Business Journal’s 2025 Economic Forecast Survey, which had 258 respondents — 75% of which have fewer than 100 employees.

Technology, driven by spending on artificial intelligence (AI), was the big winner in 2024. According to the HBJ survey, only 3% of Hartford businesses are considered tech. 

The three largest sectors, banking and finance (9.9%), construction (13%) and manufacturing (11%) did not fare as well. These industries are interest-rate sensitive; high interest rates through the first three quarters hurt. 

And while inflation did moderate in 2024, it continues to hit the construction and manufacturing sectors particularly hard.

Looking ahead into 2025, I would once again describe the Economic Forecast Survey results as “cautiously optimistic.” Over 50% of respondents are optimistic that the Connecticut economy will improve slightly or significantly in 2025. 

Indeed, economic growth has been above long-term trends. For the fourth quarter, the Atlanta Fed EconomyNOW GDP tracker is forecasting growth of 3.3%. Also, there is still ample “stimulus” from a variety of federal programs (such as the CHIPS and Science Act and Inflation Reduction Act) that has yet to hit the economy. 

The labor market remains solid. The unemployment rate has increased modestly from 3.5% to 4.2%, largely due to an increase in the labor participation rate. 

In the long run, more workers is a good thing.

Lastly, the consumer remains very strong. Two-thirds of the U.S. economy is consumption. The combination of higher home prices, strong financial markets and lower debt service costs has created a wealth effect that is fueling consumer spending. 

In short, 2025 is starting from a strong growth position and the likelihood of an economic recession is quite small. These are reasons for optimism!

The Trump effect

However, survey respondents continue to be cautious, citing taxes (30%), inflation (13%) and labor (20%) as the biggest impediments to growth. 

In addition, the recent presidential election results, Trump 2.0, provide some areas of certainty … and confusion. Given the Republican sweep of the White House, Senate and House of Representatives, tax policy is more certain. 

The corporate tax rate will likely remain at 21%, with the possibility of a 15% rate for on-shored manufacturing. The Tax Cut and Jobs Act of 2017 (TCJA), which reduced individual and pass-through tax rates, is scheduled to sunset in late 2025. 

Again, there is now a high probability that the TCJA will be extended sometime in 2025. 

On the other hand, the inflation picture is more confusing. The good news is that inflation has been trending lower. The bad news is it seems to be plateauing around 3%, significantly higher than the Federal Reserve Bank’s 2% target. 

In addition, small businesses continue to struggle to maintain and attract labor talent — 52% of survey respondents claim they will need to raise wages to attract new employees. 

Also, Trump 2.0 comes with the threat of significant tariffs, which could prove to be inflationary. A healthy debate as to whether the tariffs are part of a grand trade negotiation, or an outright threat, remains to be seen. 

Trump 2.0 also promises to reduce regulation and government waste. There are many moving parts to inflation, and it remains to be seen how these cross currents will impact it. The survey is right to be concerned about inflation. 

The economy is growing above its long-term trend rate of 2%. The labor market remains solid. Inflation has been trending lower, but has recently flat-lined around a relatively benign 3%. Trump 2.0 has policies that could fuel inflation. 

Overall, this scenario is a strong economic starting point for 2025. 

However, businesses need to manage their expectations for the coming year, particularly for inflation and interest rates. Continued expectations for future interest rate cuts are not consistent with the current, strong economic environment. The Fed is in a difficult spot. 

They have underestimated economic growth and overestimated the decline in inflation. Today, the Fed believes that current rates (4.25% -4.5%) are restrictive. As such, additional rate cuts are forecasted. The Fed’s current estimate of the “neutral rate” — the rate that neither stimulates nor restricts economic growth — is 2.9%, implying significant future rate cuts. 

The HBJ survey is more skeptical, with 66% of respondents believing rates will remain above 4% in 2025. I agree with the respondents. Given economic growth and stubborn inflation, interest rates may not achieve the lower levels anticipated by the market prognosticators.

Kenneth J. Entenmann is chief investment officer and chief economist at NBT Wealth Management.