28 Dec What Will 2025 Bring – Part 1

“2024 was a volatile year. What are the domestic prospects for 2025?” – The Lonely Realist

The Optimists: Perhaps Cassandra will be right: “The Fed will continue to cut interest rates well into 2025, driving GDP and stock market prices higher. America’s corporations have seen their earnings in 2024 grow at 11.9%, their best rate since 2021, generating record highs with generative AI adding the likelihood of higher prices in the future. The American economy is roaring, doing so even before President-elect Trump’s planned tax cuts and assault on red tape, both of which will improve productivity and corporate profitability. The freeing of America’s animal spirits with tax reductions, regulatory reform, AI development and energy superiority can only strengthen the dominance of American industry. This at the same time as small business sentiment is at a >40-year high with the National Federation of Independent Business index having enjoyed its biggest month-on-month increase since 1980. The belief of American businesses that now is a good time to invest will provide an additional tailwind for America’s economy that will ensure economic growth whatever the impact of Trumpian policies.”

The Pessimists: Or, as previously noted, perhaps the economy will falter: “While it is true that recessionary fears have proven themselves wrong over the last several years, America’s stock market cannot continue levitating forever. It cannot simply shrug off America’s massive deficits, unrepayable debt, escalating global economic wars and the military expansionism of its enemies. Despite Cassandra’s rosy predictions, there is ample evidence that now is a time to invest for safety rather than heady profits: in the $6.2 million price paid by a crypto investor for an ‘artwork’ of a banana attached to a wall with adhesive tape; for the >200% Dogecoin gain since the November 5 election; for the almost 50% post-election gain in Bitcoin (and >450% gain for MicroStrategy stock, a leveraged bet on Bitcoin); for legalized sports betting that is the ‘fun’ part of Reddit and meme ‘sure thing’ stock market and crypto gambling; etc.”

The American economy and its equity markets will continue outperforming the rest of the world in 2025.

Tariffs: If President-elect Trump utilizes tariffs as leverage, imposing them selectively and in moderation, they will offset foreign dumping and subsidies and encourage onshoring and increased domestic employment. They also will increase government tax revenue. If, however, the Trump Administration broadly imposes tariffs, emulating the Smoot-Hawley tariffs of the 1930s, the Peterson Institute for International Economics predicts that inflation will increase, fueled by increased annual consumer costs of $2,600, and economic activity will falter.
2025 will see significant volatility as tariff rhetoric and populist policies compete.

Energy: President-elect Trump’s nominee for Treasury Secretary, Scott Bessent, has pledged to lift the country’s oil and gas production by 3 million barrels/day by 2028. Increased production would increase Federal tax collections, increase energy-sector employment, strengthen the U.S. Dollar, provide the juice required for advanced AI development, and reduce America’s budget deficits, all of which would drive the American economy higher. It’s unclear, however, why America’s oil and gas producers would make the capital investment necessary to further increase production since doing so profitably will be impossible challenging. After all, America already is energy independent and already the world’s leading energy producer, and there is ample unused international capacity that has the potential to further significantly reduce the price of American-produced crude oil from today’s ~$70/barrel. (In addition to which the Trump Administration has pledged to resolve the Ukrainian conflict which could drive massive amounts of Russian oil and gas onto international markets.) Production costs would require domestic oil prices to increase to $89/barrel in order for American producers to realize a profit.
In the absence of an internationally-significant event, energy prices will continue trading within their 2024 range.

Deportations: President-elect Trump has promised to execute the “largest deportation operation in American history.” Vice President-elect Vance has added that the administration would “start with 1 million,” asserting that deportations would be economically beneficial for American workers by easing the housing crisis and generating more employment opportunities for native-born Americans: “People say, well, Americans won’t do those jobs…. But people will do those jobs.” Undocumented immigrants nevertheless comprise a major labor force, particularly in the agricultural sector where they account for ~40% of farm labor, earning the lowest possible wages. The Obama Administration’s deportation of >400,000 undocumented immigrants led to higher, not lower, American-worker unemployment by constricting sensitive economic sectors. Another analysis by the Peterson Institute for International Economics found that if the Trump administration deported 1.3 million undocumented immigrants, U.S. GDP would drop by 1.2% and employment would fall by 1.1% by 2028.
The Trump Administration will deport “criminal” undocumented immigrants, which will modestly inflate food prices and constrain economic activity.

The Budget: Early last week, Congress agreed on a plan to fund the government until March, reducing a 1,547-page bill to a 118-page one. Length, however, is not a determinant of either cost or waste. Among other things, the bill includes $100 billion for disaster relief and $10 billion for farmers, and the Senate (in a bill sponsored by Vice President-elect Vance) voted to boost Social Security benefits for public-sector employees by ~$200 billion over 10 years.
Despite the best of DOGE intentions, elected officials in 2025 will not reduce America’s debt. The deficit will continue to exceed $1 trillion/year.

Taxes: Federal tax collections will take a significant hit in 2025. State taxation will see competition heating up between Blue States and Red States. With its historic control of all three branches of government, the Trump Administration will attempt a major tax overhaul and, whether or not it succeeds, America’s economy will be propelled higher in 2025 by incentivized industrial and foreign investment.

Finally (from a good friend)