The Republican sweep of the 2024 elections is set to transform the economic outlook for 2025. President-elect Trump will take office with ambitious economic plans: Roll back regulation, cut taxes, raise tariffs, and curb immigration. Republican majorities in the Senate and Congress will help foster his plans to reality. This is a challenging moment to forecast. Specific assumptions about post-election policies are sure to be wrong in some respect, but a forecast that ignores the election entirely is even more likely to miss. Comerica’s December forecast lays out one plausible scenario for how policy changes might affect the outlook for the economy and interest rates.
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Our forecast assumes the next Congress passes a major tax bill, combining extensions of some expiring provisions of the 2017 tax cut, reversal of some Biden-era tax increases, and follow-through on some tax-related campaign promises. Fiscal stimulus through tax cuts provides a significant incremental boost to disposable incomes and corporate profits, with pass-through to consumer spending and hiring.
These effects become visible in economic statistics well ahead of when the tax cut becomes effective (presumably in 2026). The first surveys conducted after the election show business leaders are upbeat as they look forward to a more business-friendly approach in Washington. “Animal spirits” will likely boost consumer spending and job openings in the first half of 2025 as affluent consumers and businesses act on their good vibes.
Comerica’s forecast accordingly raises the outlook for real GDP growth in 2025 and 2026. It also assumes that tariff rates increase. That lifts near-term growth of industrial production, contributes to higher prices of consumer and capital goods, and as a result raises inflation. The forecast also assumes that curbs on immigration slow the growth of the labor force (fewer immigrant workers). Solid economic growth and a tighter labor supply bring the unemployment rate back under 4% by mid-2025.
If the economy evolves along these lines, the Fed will see less need to cut interest rates in 2025 than signaled in their September Dot Plot. Comerica’s forecast sees the Fed cutting the fed funds target three quarters of a percent between Thanksgiving 2024 and the end of 2025. The 10-year Treasury yield is forecast to average between 4.25% and 4.75% in 2025, and the 30-year fixed mortgage rate between 6.25% and 7.00%. The Fed is likely to end its balance sheet run-off program in mid-2025 as their total assets fall to between $6.4 and $6.6 trillion. Higher interest rates mean slower growth of home sales in 2025 than in Comerica’s October forecast, but sales in 2026 are projected above the prior forecast due to pent-up demand, tax cuts fueling purchasing power, and wealth effects.
For a PDF version of this publication, click here: December 2024 U.S. Economic Outlook.
Authors: Bill Adams is Chief Economist and Waran Bhahirethan, Senior Economist for Comerica Bank.
