In 2024, the S&P 500 surged more than 20%, while the dollar and bond yields retreated midyear but rebounded strongly in Q4, driven by stabilizing economic data, waning recession fears, and the “Trump trade” effects. Last week, with stronger-than-expected jobs data and reignited inflation concerns, the dollar index climbed back above the 109 mark, and the 10-year Treasury yield spiked past 4.7%. As we enter 2025, what’s the outlook for the U.S. economy? And how could this shape asset performance? In this outlook article, we dive into three key aspects: the economy, monetary policy, and fiscal policy.
I. Economic Outlook: Robust Growth with GDP Growth Slightly Above Long-Term Average
In 2024, the U.S. economy outperformed market expectations, maintaining an annual growth rate of close to 3%, mainly underpinned by resilient consumer spending, which accounts for more than half of U.S. GDP. Going into 2025, we anticipate consumption to remain a crucial pillar for growth, supported by three key factors: increased willingness to spend, interest rate cuts to bolster interest-sensitive sectors, and a robust labor market. Since we’ve touched upon the first two factors in our January report, we’ll dive deeper into the third one about the labor market here:
1. Consumption: Labor Market to Further Stabilize, Fueling Steady Growth
In mid-2024, employment data briefly softened, and job growth was further dampened by subsequent short-term factors like hurricanes and auto strikes. However, recent data suggests that nonfarm payrolls have rebounded from that mid-year weakness, with average monthly gains returning to 170,000 over the past three months. Stabilizing around 1.1, the job openings-to-unemployment ratio also ceased to decline, indicating the job market is no longer deteriorating. In other words, while it has become more challenging for job seekers to find employment compared to the past two years, those already employed are less likely to face layoffs.
JOLTS data and unemployment claims paint a similar picture. The slowdown in labor demand from businesses has made it more difficult for unemployed individuals to secure jobs, but also reduced workers' willingness to switch jobs, which has in turn led to a slowdown in voluntary quits. Meanwhile, the good news is that there are no signs of mass layoffs from companies. Together, these data points suggest that the job market remains stable and is expected to support healthy consumption levels in 2025.
As for potential concerns, a potential headwind lies in the tightening effect of the incoming Trump administration's immigration policy on labor supply. According to the Pew Research Center, undocumented immigrants account for approximately 5% of the total labor force. The market is concerned that if Trump were to deport the estimated 13-14 million undocumented immigrants currently residing in the U.S., labor supply would tighten again, hindering economic growth and reigniting wage inflation. However, currently our assessment suggests that the short-term risks will be limited.
First, drawing from historical experience, during his first term, Trump also promised large-scale deportations of undocumented immigrants. However, as shown in the chart below, the number of deportations carried out by ICE from within the interior of the U.S. did not increase significantly during his term, peaking at around 90,000 per year, even far below the peak of over 200,000 removals under the Obama administration.
Second, deporting approximately 13 million undocumented immigrants would be extremely costly. According to the American Immigration Council, a one-time mass deportation would cost at least $315 billion, while a longer operation of deporting 1 million people each year would cost $88 billion annually (amounting to a total cost of close to $1 trillion to deport the entire undocumented population). From a practical standpoint, it would be difficult to recruit a large number of law enforcement officers and expand detention facilities in a short period of time.
Therefore, we believe that Trump’s immigration policy is more likely to focus on tightening border control and limiting the inflow of immigrants, while the expansion of deportations of those already residing in the U.S. should remain limited. Furthermore, as mentioned above, the U.S. job market is currently balanced in terms of supply and demand. We believe that as long as Trump maintains a similar approach as his first term, refraining from large-scale deportations of domestic immigrants, the impact of immigration policy on the already balanced labor market will likely be minimal.
2. Investment: Domestic Investments Driven by Legislative Initiatives to Bear Fruit
In addition to robust consumption supported by the labor market, domestic investment is another noteworthy driving force that could contribute meaningfully to economic growth. During Biden's presidency, various bills were introduced to stimulate domestic investment, including the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act (CHIPS), and the Inflation Reduction Act (IRA). According to data from the White House, under the Biden administration, these initiatives have already attracted $1 trillion in private investment, including $446 billion in semiconductors, $184 billion in electric vehicles, and $92 billion in clean energy infrastructure.
Benefiting from these bills, construction spending in the manufacturing sector has surged significantly over the past three years, doubling compared to 2020. Its share in total nonresidential construction spending has also risen from 9% to 20%. Given that boosting domestic investment has historically been an area of bipartisan consensus, it is expected that the Trump administration will continue to deploy the authorized funds from these bills to promote domestic investment. For instance, the CHIPS Act still has $7 billion earmarked for semiconductor manufacturing projects, while the IIJA has nearly $300 billion of unallocated funds to be expended by 2026. With continued capital inflows and the gradual deployment of allocated funds in recent years, investment is expected to increasingly contribute to economic growth, driving further productivity gains in the manufacturing sector and sustaining overall productivity at high levels.
MM Research Summary: Overall, we expect the U.S. consumer market to remain robust in 2025, while the contribution to growth from legislation-driven investments will gradually materialize, allowing annual GDP growth to stay slightly above the long-term average of 1.8~2.0%. Moving forward, key trends to monitor include: (1) whether the job openings-to-unemployment ratio remains stable, and (2) whether year-on-year growth in real output per hour, a key proxy for productivity growth, remains strong. If these metrics perform in line with expectations, the U.S. economy would remain on solid footing with no major concerns.
II. Monetary Policy: Pace of Rate Cuts Slows But Policy Direction Unchanged, Monitor Balance Sheet Adjustments
Turning to monetary policy, in 2024, the Fed first made adjustments to its balance sheet reduction efforts, slowing the pace of balance sheet runoff starting in June by lowering the monthly redemption cap on Treasury securities to $25 billion (from $60 billion) while maintaining the monthly redemption cap on mortgage-backed securities (MBS) at $35 billion. Meanwhile, the much-anticipated rate cut cycle only did not begin until the second half of the year. Looking ahead to 2025, although rate cut expectations have been retreating recently, we believe the Fed’s more cautious approach of retaining ammunition in the face of a robust economy should not be seen as a major downside for the market, especially considering the overall direction of monetary policy has remained unchanged. Our views on interest rates and balance sheet reduction are as follows:
1. Interest Rates: Inflation Still on Downward Trajectory, Fed Shifts to “Wait-and-See” Mode Keeping Dry Powder on Hand
Despite the surprising upward revision to inflation projections in the December Summary of Economic Projections (SEP), Fed Chair Powell’s remarks at the post-meeting press conference indicated that the Fed's view on inflation has not changed much. On one hand, the revised projections reflect the fact that some officials have taken into account the potential effects of Trump-era policies. On the other, projections were also raised in response to the upward adjustment in economic growth forecasts, which is not bad news for the stock market. Real concerns would only arise if inflation deviates from its downward trajectory, forcing the Fed to face the difficult trade-off between economic growth and inflation. But based on the current data on rent, wages, and oil prices, we believe that inflation is still moving in the right direction.
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