2025 Economy Outlook: Andy Drennen

Some economists say the U.S. economy is expected to grow around 3% in 2025. What are you seeing and what are some of the factors that are driving that growth?
Advances in technology will be a big catalyst for growth in 2025. We saw a lot of advances in artificial intelligence. I think that’ll improve efficiencies as we move forward into next year and the years beyond that. Companies are putting billions and billions of dollars into AI and they’re building data centers near nuclear power plants to generate the power. We’re still at what I would say is full employment. Unemployment ticked up a little bit, I think we’re at around 4.2%. Inflation, depending on what you’re looking at, overall is coming down. [It’s] still not hit the Fed’s 2% target. But wage growth overall is about 4%. So, that’s outpacing the rate of inflation as well, so that would support purchasing and consumer confidence, which would also lead to economic growth next year.

The Federal Reserve cut interest rates for the third time this year on Dec. 18. They are looking for two more cuts in 2025. But as you mentioned, that 2% desired inflation rate is still a ways off. Why haven’t the rate cuts produced that desired effect sooner, and how do you think inflation will continue to impact businesses in the coming year?
We were anticipating rates to move down a little more dramatically across the yield curve, and that hasn’t happened. One of the potential reasons for that is the policies with the Trump agenda could be inflationary longer term. If inflation is a risk, that could keep longer term interest rates elevated. That’s one of the things I think the Fed’s looking at and trying to gauge because what they don’t want to do is undo all the work they’ve done the last couple of years. If we see it start to pick back up, then they could be forced to put more restrictive policy in place by raising interest rates and then that could deter growth. We’re in a strong economy, but yet the Fed’s reducing interest rates. Typically, it’s the inverse of that. That’ll be an interesting development over 2025.

To hit on workforce, it seems like I am reading and hearing the term productivity a lot more, how to make people and processes more efficient. What kind of impact do you think that that’s going to have on the labor market in 2025?
Productivity increases the standard of living. The more productive a person is, that could provide them more income, increases in salary, perhaps more time off. Their productivity could also lead to more business profits. The U.S. is trying to position ourselves to be a leader in that space by adapting new technologies to increase productivity and have us remain the economic engine of the world.

Where do you think wages might land in 2025?
I’m curious to see how the end of (2024) shapes out because we’re at an inflection point to where wage growth has come up and unemployment has come down. If you look historically when that happens, they tend to diverge and go the opposite direction, which means we could see wage growth go down and unemployment tick up. That’s the question is how long can we keep unemployment where it is and keep wage growth growing? I might be in my own camp here, but I think if we do have tariffs, if there are other inflationary pressures at some point in the near future, we could see companies feeling more strain on their financials to where if inflation is costing more and we have more input costs and productivity is up, we could see them start to cut employees. That would tie directly into what I was talking about, which is wage growth going down and unemployment going back up. That’s probably the threat at the end of next year.

What kind of impact do you think the proposed increase in tariffs by the incoming Trump administration are going to have on the business landscape?
Make no mistake, the U.S. consumer is the one that’s paying those tariffs. So, if it costs a company more to import, that is getting passed on to the consumer. And then on top of that, we have the reshoring of American manufacturing, the (Creating Helpful Incentives to Produce Semiconductors) Act and things of that nature to bring jobs back home. All those things could increase the costs to companies. That alone could be inflationary longer term. At some point you just ask the question, how much can the consumer bear? Of course, it depends on the product.

What anticipated policies of the incoming administration could prove to be a bright spot for the economy?
There’s certainly reason for optimism. In Trump Republicans agenda, they looked for increasing domestic production of fossil fuels. We’ve been energy independent since 2019. We’re finally a net exporter of oil, which gives us quite a bit of power. I think there’re going to be a lot of push for AI technology and different ways to power these technologies. I think we’re going to see nuclear power become more of a player. I think there’s going to be less focus on environmental, social and governance priorities. There could be some terms that could modify the Inflation Reduction Act, which had a lot of green energy initiatives. That could lower energy costs. We’ve seen what gas prices have done just the last month or so. Energy’s down about 3% over the last year, so that could potentially be a stabilizing factor with the inflation piece. Banking financials, we could see a lot of deregulations there. They’re pro-business and pro-new technologies and trying to give companies and the United States a competitive advantage, so there would be substantial investment or more permissions granted and growth in those kinds of newer technologies. Especially with the CHIPS Act bringing semiconductors manufacturers home. More of a protectionist approach is the Trump agenda.

To the stock market, what do you expect returns to look like next year?
I’ll preface this by saying past performance does not guarantee future results. We had tremendous gains this year, up well over 20% stacking on top of another huge 20%-plus return last year. I don’t expect us to hit that this coming year. I think if we can get mid to upper single digits, maybe 10%, that would be a win. But projections are that 2025 growth estimates for S&P 500 earnings are going to be like 15%, which would be huge. I kind of like to under promise and over deliver.