2025 Macro Outlook
#135: Economic data, market prognosis, macro portfolio.
Last week, we looked back at the dynamics of the past year and graded our 2024 predictions. Today, we cover the macroeconomic and monetary policy outlook for 2025, and provide a fresh prognosis and macro portfolio for the year ahead. Next week, we will introduce our Trade Ideas for 2025.
Six simple words carried the Federal Reserve’s message this Wednesday.
“We are in a new phase.”
For over two years, the path of monetary policy has been clear. Since the wave of inflation crested back in 2022, investors have eagerly eyed the return of financial easing and a supportive central bank. Even as the Federal Funds rate continued to climb into 2023, the light at the end of the tunnel seemed to only shine brighter, markets basking in the glow. This past year — 2024 — was to be the year of cuts, and as I write in December, the Fed has delivered 100bps of relief.
And yet, just as soon as the long-awaited cuts have commenced, we find ourselves at a new, uneasy junction. Despite a COVID bullwhip and rate-driven volatility in certain industries, the U.S. economy has side-stepped recession, powered by big fiscal spending, technological innovation, and a sturdy consumer. Labor markets have unwound from their incredibly tight peaks but remain resilient. Risk assets have enjoyed two years of widespread gains as financial conditions have eased. Meanwhile the easy progress towards the Fed’s 2% inflation target has stalled out in the last quarter mile.
Markets face a trillion dollar question — is the monetary easing starting or is it already done? As Jerome Powell uttered those six big words, markets let out an exasperated groan — stocks dumping and yields jumping — contemplating what this new phase might mean.
In preparation for the year ahead, let’s go back to the data — labor, inflation, growth, and credit — to understand the implications for monetary policy. Then, I’ll give you my best prognosis on markets and macro portfolio for the year ahead.
Macroeconomic Indicators
A. Labor and Employment:
Reading the labor market has been a challenge in this unusual decade. Widespread but temporary unemployment in 2020 gave way to a gangbuster rebound, with massive labor shortages eventually leading to over-staffing. Now as the labor market has slowed, it is hard to differentiate a cyclical slowdown from a simple normalization.
Contradictory data confounds the equation. Payrolls, according to the BLS establishment survey and ADP, continue to grow at a reasonable pace, but the household employment survey suggests nearly zero growth in employment levels over the past year — a historic divergence. The unemployment rate is rising, but unemployment insurance claims are flat.
In short, the labor market is “resilient” relative to expectations, but it is not necessarily “strong” in absolute terms. Payroll gains remain positive and the unemployment rate has steadied over the past several months, but the internal readings continue to slide to the downside. Though, while labor deterioration usually begins before a recession, a full recovery and rebound in activity usually does not begin until after the recession has concluded. It’s possible that some of these negative indicators are lagging effects.
Normalization is probably the best explanation of the current dynamics, but it is not yet fully normal. There is enough ambiguity here to justify ongoing cuts, if preferred — the Fed has stated clearly that it does not see the labor market as adding inflationary pressure.
But the evolution of this labor data will be critical for policy in 2025. A positive inflection in hiring rates, job openings, or claims data would point to the beginning of a new labor cycle, adding inflationary pressure and calling into question the rationale of any incremental easing.
B. Inflation