US economy is exiting the fast lane

The economy remains in transition and is settling into a more sustainable pace of growth, with next year being decent but unspectacular. In our view, the probability of a recession in the next 12 months is low, but not zero. Some of the naysayers’ doubts about the expansion’s durability are rooted in unreliable survey-based data and the rise in the unemployment rate.

What you will learn:

• The forecast is for GDP to rise 1.9% next year, not significantly below the economy’s short-run potential. This is still sufficient to avoid a recession, barring an exogenous shock.
• The labor market is expected to hold up as we don’t anticipate an increase in the unemployment rate because labor force growth is set to slow in 2025 and the break-even level of job growth will decline. Layoffs are expected to remain relatively low and the recent rise in temporary layoffs isn’t the ominous sign that it was in the 1970s and 1980s.
• Of course, the proverbial elephant in the room is the outcome of the presidential election and the composition of Congress. Presidents inherit an economy and it often takes time before their policies begin to shape it. The variance between our baseline forecast and various election scenarios is generally minimal in 2025, with the noticeable deviation in 2026. The balance of power in Congress matters for the 2025 outlook and our baseline assumption of a divided government is still on track.