Our economic outlook for the United States
March 21, 2025
Our outlook for year-end 2025
1.7%
Economic growth,
year over year
Uncertainty around tariffs, immigration, and other policy is likely to weigh on growth in 2025. Real-time signals point to a material slowdown in GDP growth in the first quarter. We have lowered our full-year 2025 GDP forecast from 2.1% to 1.7%. Headline growth moderated in the fourth quarter of 2024. The volatile inventories component helped shave growth to an annual rate of 2.3% in the fourth quarter, down from 3.1% annual growth in the third quarter. However, when excluding the choppy inventories and net exports categories, domestic demand continued to run at about a 3% pace. For all of 2024, real GDP increased by 2.5%, down from a 3.2% increase in 2023.
2.7%
Core inflation, year over year
The effects of U.S. tariffs and other nations’ corresponding measures put upward pressure on goods prices, leading us to increase our full-year 2025 inflation forecast from 2.5% to around 2.7%. Our forecast is based on the Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index. Core PCE gained 2.6% year over year in January, down from 2.9% in December, but was still materially above the Fed’s 2% target. Goods prices normalized to prepandemic levels in 2024, but activity this year points to a tariff-related acceleration.
3.75%–4%
Monetary policy rate
The Federal Reserve left its target for the federal funds rate unchanged in a range of 4.25%–4.5% on March 19. New Fed projections suggest a softening of the economy amid policy uncertainty. Vanguard anticipates two Fed rate cuts in the second half of 2025, which would leave the policy rate at year-end in a range of 3.75%–4%. The Fed’s next policy announcement is scheduled for Wednesday, May 7.
4.4%
Unemployment rate
The U.S. labor market showed continued strength in February, but early signs point to a slowdown in job growth in March. The U.S. added 151,000 jobs in February, most of them in the private sector. Revisions to December and January data put the three-month job creation average at 200,000. The unemployment rate rose from 4.0% to 4.1% as self-employment fell by 316,000. (The headline job creation number and the unemployment rate come from separate surveys of businesses and households that often diverge in a given month.) Signs point to a considerably softer employment report for March than we’ve become accustomed to. Recently announced government layoffs will appear in the March report, and we expect private-sector industries that are sensitive to government spending to have experienced little employment growth.
What I’m watching
In a consumer-driven economy, mind the labor market
Heavily followed labor-market measures, such as the unemployment rate, can obscure the sources of increases in unemployment. Because the job-loss rate focuses on demand and reduced demand is a more worrisome economic signal than increased supply, the job-loss rate is a good barometer. It measures the probability of a worker becoming unemployed in any given month.
With nearly 162 million workers on U.S. payrolls, even a 0.1 percentage point rise in the job-loss rate would translate to nearly 162,000 additional workers becoming unemployed, which can have knock-on effects on consumer activity. The job-loss rate stood at 1.07% in September 2024, up from 0.91% eight months earlier but still well below its historical average of 1.36%, suggesting the U.S. economy remains well-poised entering 2025.
Adam Schickling,
Vanguard Senior Economist
Monthly probability of a worker becoming unemployed
Notes: For any given month, the job-loss rate reflects the number of workers who moved from employed to unemployed divided by the employment level in the prior month. Data reflect the period from January 1991 through September 2024. Shaded areas represent U.S. recessions, as determined by the National Bureau of Economic Research.
Sources: Vanguard calculations, based on U.S. Bureau of Labor Statistics data from the Federal Reserve Bank of St. Louis (FRED).
What I’m watching
Above-trend business investment in technology and R&D
Business investment—spending that accounts for nearly 14% of U.S. economic output on long-lasting assets used to produce other goods or services—has nearly fully recovered to its pre-pandemic trend, according to recently revised government tallies of gross domestic product and its components over the last five-plus years.
What stands out is that this improvement has largely been concentrated in a few categories—software, information processing equipment, and research and development (R&D)—that tend to be productivity-enhancing in the long run. Such spending now accounts for roughly 50% of business investment and has been above trend since 2021. Other categories of business investment remain below trend.
We expect ongoing technology and R&D investments to contribute to U.S. economic growth in 2025 and to support the productivity tailwinds that have pushed up our estimate of potential growth.
Rhea Thomas,
Vanguard Economist
U.S. business investment in technology and R&D versus all other categories: Changes from pre-pandemic trends
Notes: Business investment reflects inflation-adjusted spending by U.S. businesses and nonprofits on fixed, domestic, nonresidential structures, equipment, and intellectual property products. Technology investment reflects spending on software and information processing equipment. The charted data reflect quarterly changes in the two broad categories compared with their pre-pandemic (2015-2019) trends, from the first quarter of 2019 through the third quarter of 2024, as measured by the U.S. Bureau of Economic Analysis as part of annual revisions issued on September 26, 2024.
Sources: Vanguard calculations, using BEA data from Macrobond.
What I’m watching
Falling U.S. shelter inflation must recede further
Shelter accounts for 45% of the core Consumer Price Index (CPI) and 17% of the core Personal Consumption Expenditures Price Index. That’s why further reductions in shelter inflation—recently still climbing at a 4.9% year-over-year rate—will be necessary in order for core inflation, which excludes food and energy, to return to the Fed's 2% target. We don’t think its goal will be met anytime soon.
We expect shelter inflation to remain above 3% for most of 2025, consistent with our 2.9% forecast for the core CPI at year-end 2025. Although leading indicators suggest that rents will fall and the Fed has indicated it will look through shelter inflation, upside risks may emerge. We’re watching the potential for tighter trade and labor availability that could limit new housing supply, as well as interest rates that could remain high enough to discourage existing homeowners from selling. All three factors could delay the shelter recovery and keep prices elevated throughout next year.
Ryan Zalla,
Vanguard Economist
Contributions to year-over-year shelter price changes
Notes: Shelter components reflect monthly Consumer Price Index (CPI) data. Owners’ equivalent rent measures the inflation in single-family homes by estimating how much they would cost to rent. The pre-pandemic average (2.7%) reflects year-over-year changes in the CPI’s all-shelter component from January 2001 through December 2019.
Sources: Vanguard (for the all-shelter and core CPI forecasts) and Refinitiv Eikon Datastream (for historical U.S. Bureau of Labor Statistics data through September 2024).
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