S&P Global U.S. Forecast Update January 2025

Jan. 13, 2025

By Delaney O’Kray-Murphy, EBRC Research Economist

Risks more balanced in January forecast as inauguration looms

S&P Global have released their January 2025 forecast update for the U.S. The current forecast is based on the following assumptions:

This forecast assumes the implementation of a 10% universal tariff along with a 30% tariff on imports from mainland China; the average effective tax rate rises from 3.0% in the first quarter of 2025 to 16.4% by the first quarter of 2026.
Deportations combined with a sharply reduced inflow of immigrants will reduce U.S. aggregate supply and aggregate demand. This forecast assumes net international migration will be reduced, relative to Census projections, by about 500,000 per year during the four years of the Trump presidency.
The forecast encompasses the Fiscal Responsibility Act of 2023. Personal income tax cuts related to the 2017 TCJA are extended. Some exclusion of tip and overtime pay from federal taxation is assumed to be adopted. Corporate tax policy now assumes a lower corporate tax rate on corporate income from 21% to 15% for corporations that produce domestically. Scheduled Social Security and Medicare benefits are paid beyond the projected exhaustion of those funds.
After cutting by 100 basis points (bps) in 2024, the Fed cuts twice over the course of 2025, by 25 bps in March and June, before pausing until the third quarter of 2026. Thereafter, the FOMC again cuts at every other meeting until eventually reaching a target range of 3.00% - 3.25% by early 2027.
Real foreign GDP contracted by 4.7% in 2020, rebounded to 5.6% in 2021, then slowed to 3.4% in 2022 and 2.0% in 2023. The forecast calls for it to remain at 2.0% in 2024 and 2025, followed by a rebound to 2.2% in 2026.
The price of Brent crude oil rose to $113 per barrel in the second quarter of 2022, up from $80 per barrel in the fourth quarter of 2021. The price is forecast to drop to $72 per barrel in 2025 and $69 in 2026 before gradually rising at the rate of inflation.

The baseline forecast (summarized here) is assigned a 50% probability. The pessimistic scenario is assigned 25%, and the optimistic scenario is assigned the remaining 25%. The optimistic outcome is 5% higher compared to the December forecast.

The impending shift in economic policy generates a significant slowdown in economic growth and higher inflation. Tax cuts, combined with tariffs and reduced immigration (and deportations), give rise to a period of elevated inflation, to which the Federal Reserve is forecast to respond by pausing its easing cycle in mid-2025. This, in turn, gives rise to tighter financial conditions, which will further weaken aggregate demand. In addition, foreign countries are expected to respond with retaliatory tariffs on U.S. exports.

After increasing by 2.5% in 2022 and 2.9% in 2023, the baseline forecast calls for real GDP growth to moderate to 2.8% in 2024 and drop to 2.0% in 2025. On a quarterly basis, the forecast calls for real GDP to increase through 2034 (no recession).

Headline inflation spiked in 2022 to 8.0%, then decelerated to 4.1% in 2023. It is forecast to slow again to 3.0% in 2024 and 2.9% in 2025. Inflation rises to 3.3% in 2026, primarily driven by tariffs, reduced immigration, and tax cuts.

The unemployment rate peaked at 8.1% in 2020 but fell to 5.4% in 2021 and again to 3.6% in 2022. It remained at 3.6% in 2023 and is forecast to rise to 4.0% in 2024 and 4.4% in 2025.

Nonfarm payroll jobs nationally dropped by 5.8% in 2020 but rebounded with growth of 2.9% in 2021 and 4.3% in 2022. Jobs rose by 2.3% in 2023 and are forecast to slow to 1.6% in 2024 and 0.9% in 2025.

Housing starts surged in 2021 to 1.61 million units. Activity remained strong in 2022 at 1.55 million. Starts fell to 1.42 million in 2023 and are forecast to slow to 1.35 million in 2024 and 1.31 million in 2025, as high interest rates and inflation take a toll on housing activity.

Exhibit 1 summarizes the January 2025 forecast from S&P Global. Exhibit 2 shows the December 2024 projections and Exhibit 3 shows the difference.