As 2025 approaches, investors are grappling with questions regarding the U.S. economy, a key driver of global growth in recent years. Concerns include whether the Federal Reserve can orchestrate a soft landing amidst recessionary forces, and how political changes in key countries may influence economic measures.
Inflation has been reduced from mid-2022 highs, nearing the Fed's 2% target, yet unemployment has risen over the past year. The Fed initiated a rate cut cycle in September 2024, responding to labor market deterioration.
While the unemployment rate remains historically low, the rapid increase raises concerns, particularly as the Sahm rule indicates a recession may be imminent. Some market actors attribute rising unemployment to an expanding labor force, including immigration, suggesting solid hiring could mitigate issues.
However, recent labor trends show sluggish job creation when excluding public sector, healthcare, and private education jobs. Layoffs remain moderate, but significant increases could jeopardize the desired soft landing.
Consumers are feeling pressure as post-COVID-19 inflation diminishes their discretionary spending capacity, particularly among middle and lower-income households. Rising delinquency rates on credit cards and auto loans reflect this trend.
A small subset of large firms is driving profit growth, while many small and medium enterprises struggle with high financing costs and declining profits. This consumption disparity may pose risks for economic demand and growth.
The U.S. economy has outperformed developed markets since the pandemic, supported by public spending and accumulated savings. However, these savings are dwindling, and the government's ability to increase deficits may be limited.
Donald Trump will face these economic challenges upon his return to presidency, with the cost-of-living crisis impacting American households. Despite signs of apparent economic strength, average Americans express concern.
Global economic stagnation, particularly in the Eurozone and recent weaknesses in the UK, Australia, and New Zealand, further complicates growth prospects. In China, recent stimulus measures have disappointed markets, revealing structural issues.
Political instability in Germany and France may lead to policy paralysis, while the UK adjusts to new government budgets impacting long-term growth outlooks. Trump's re-election has shifted focus to his protectionist rhetoric.
Inflation appears contained, with structural factors driving recent increases dissipating. The overall inflation rate is nearing targets in many developed countries, although core inflation remains slightly elevated.
Concerns linger about Trump's policies potentially being inflationary, despite skepticism regarding his ability to introduce measures that would exacerbate inflation during a cost-of-living crisis.
Geopolitical factors will also demand attention, as resolutions to conflicts in Ukraine and the Middle East could exert downward pressure on commodity prices.
Current monetary policy appears too tight, necessitating further easing. The labor market is showing troubling signs, prompting close monitoring of unemployment claims for indications of a significant slowdown.
Historically, the U.S. economy has experienced forced landings about 80% of the time, with soft landings occurring only 20%. Given these empirical patterns, markets may be underestimating the likelihood of a slowdown, which could compel the Fed to cut rates more aggressively than currently anticipated.