Comprehensive US Economic Forecast for 2025
In the following scenario, to maintain that economic growth, Trump needs to avoid tariff levels that significantly dent consumer purchasing power or spark a broader investment pullback. The scenario I provided does that.
Executive Summary
Under my specified assumptions, I project real GDP growth of 2.1% or higher and inflation (CPI) of 3.1-3.4% for 2025. This represents a moderate slowdown from 2024 levels, with persistent inflationary pressures from tariffs partially offset by lower energy costs and moderated trade tensions.
Key Assumptions Integration
My scenario assumes significantly lower tariffs later this year.
- China tariffs: 15% (reduced from current levels)
- Mexico/Canada tariffs: 10% (with USMCA exemptions)
- EU tariffs: 5% (with reciprocal tariff elimination)
- Asia-Pacific tariffs: 10% baseline (reciprocal tariffs dropped)
- Japan: Auto tariffs eliminated, 10% baseline elsewhere
- Wage growth: 4%
- Gas prices: $2.75 national average
- Unemployment: 4.6% by October 2025
- Fed Funds Rate: 3.75% (October 2025)
- 10-year Treasury: 4.0% (October 2025)
GDP Analysis
Real GDP Growth: 2.1-2.4%
Components Analysis:
Consumer Spending (C): Real consumer spending is projected to grow 2.2-2.9% in 2025, following a 2.8% advance in 2024. My assumption of 4% wage growth supports this, though the average per-household consumer loss of $2,100-$3,800 from tariffs will partially offset wage gains.
Investment (I): Business investments are forecast at 1.6% in 2025 as businesses delay investment decisions due to trade policy uncertainties. The lower, more predictable tariff structure in my scenario should improve this to approximately 2.0-2.5%.
Government Spending (G): Government spending cuts and layoffs continue over the next few years, which subtract value from overall growth. Federal employment has already declined, creating a drag on GDP.
Net Exports (NX): Real exports will grow by 0.7% in 2025 and real imports by 1.8%, though reduced tariff scenarios should improve trade flows modestly. A weaker dollar would improve this scenario which had not been taken into account.
Inflation Analysis
CPI Inflation: 3.1-3.4%
Core PCE: 2.8-3.0%
Tariff Impact: Current 2025 tariffs have raised the price level by 2.3% in the short-run. My lower tariff scenario (effective rate ~12-15% vs. current 22.5%) reduces this pressure significantly. The tariff impact could add 0.5-0.8 percentage points to core PCE inflation under my assumptions.
Energy Component: My $2.75 gas price assumption is favorable – gasoline prices have fallen 11.8% year-over-year and energy declined 0.1% in April.
Services vs. Goods: Services inflation has shown signs of softening while goods prices reflect early tariff impacts. My scenario balances these effects.
Labor Market Dynamics
Unemployment Path: The unemployment rate is expected to rise above 4.5% by the third quarter of 2025, consistent with my 4.6% October target. Current unemployment is 4.2%, indicating a gradual labor market softening.
Wage Growth: My 4% assumption aligns with the current annual wage growth of 3.8-4.1%. Tariffs resulted in a relative employment decline of about 1.8 percent, equivalent to approximately 220,000 jobs lost historically, but my moderated scenario reduces this impact.
Macroeconomic Model Framework
Using established multiplier effects:
Fiscal Multiplier: The spending multiplier formula is 1/(1-MPC), typically ranging from 1.5-2.5.
Tariff GDP Impact: Models show tariff increases reduce real GDP by 0.03-0.04 percentage points per 1 percentage point of additional effective tariff rate. Your scenario reduces tariff pressures by approximately 7-10 percentage points from current levels, potentially adding 0.2-0.4 percentage points to GDP growth.
Interest Rate Effects: My Fed Funds rate of 3.75% (vs. current 4.25-4.50%) and 10-year yield of 4.0% provide modest stimulus. The neutral real interest rate will likely decline in the near term due to tariff impacts on investment.
Risk Assessment
Upside Risks:
- Trade deals and deregulation scenarios could unlock new growth levels, with real GDP rising 2.9% in 2025. (I don’t expect this to happen until 2026.)
- Productivity gains from reduced trade uncertainty
- Consumer confidence recovery
Downside Risks:
- Material risk of near-term costs, namely higher prices and a growth slowdown that could turn into recession
- Retaliation escalation despite my assumptions
- Financial market instability
My Projections (Although my model projects 2.2-2.3% GDP, I expect real GDP for 2025 to be 1.8% to 2.2% based upon final tariffs being a tad higher than my model.)
GDP (Real): 2.3 ± 0.1%
- Real GDP: 2.3% ± 0.1%
- GDP Deflator: 1.7%
Inflation:
- CPI: 3.2% ± 0.2%
- Core CPI: 2.9% ± 0.1%
- PCE: 2.8% ± 0.1%
Supporting Metrics:
- Unemployment: 4.6% by Q4 (as assumed)
- Consumer Spending: +2.5% real
- Business Investment: +2.2% real
- Productivity Growth: +1.1%
This analysis incorporates my policy assumptions while accounting for established macroeconomic relationships, current economic momentum, and the complex interactions between tariff policy, monetary conditions, and domestic demand patterns.
It’s possible
The final tariff assumptions outlined—15% on China, 10% on non-exempt Mexico and Canada imports, 5% on the EU, and a baseline of 10% elsewhere — may be a tad higher in the endgame of Trump’s trade strategy, especially if the administration’s goal is to walk the fine line of economic stimulus through deregulation and protectionism without tipping into recession territory before next year’s midterm election.
A 2% real GDP target in 2025 is politically important: it keeps the economy “respectably growing” without overheating and supports corporate profits heading into next year’s midterms. But to maintain that growth, Trump needs to avoid tariff levels that significantly dent consumer purchasing power or spark a broader investment pullback. The scenario I provided does that. So, while the tariff policy as modeled threads the needle — offering just enough pressure to extract better trade terms without derailing the economy — it’s reasonable to think Trump might edge tariffs slightly higher on specific non-essential categories (think luxury goods, green tech, or autos not assembled in the U.S.) to boost revenue and political optics without causing too much economic drag. These targeted bumps could provide additional leverage in trade negotiations and pad federal receipts — all while preserving the appearance of toughness abroad and ensuring the macro data doesn’t slip significantly beneath that politically symbolic 2% real growth threshold.
In other words: the real tariff floor may be slightly higher than it looks — just enough to stir headlines, not enough to tank the data.
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