Our economic outlook for the United States
February 21, 2025
Our outlook for year-end 2025
2.1%
Economic growth,
year over year
Headline growth moderated in the fourth quarter of 2024, but underlying measures reveal continued strength. Continued robustness may owe more to fortuitous supply-side factors such as higher productivity growth and a surge in available labor than it does to traditional definitions of a “soft landing.” While these positive supply-side drivers of growth may continue in 2025, emerging policy risks such as the implementation of trade tariffs and stricter immigration policies may offset gains. Our 2025 growth forecast reflects current assumptions about potential changes to trade and immigration policy.
2.5%
Core inflation, year over year
Core inflation as measured by the Consumer Price Index (CPI) was well above expectations in January, while a noteworthy gauge of inflation expectations shot higher. Core inflation, which excludes volatile food and energy prices, registered 0.4% month over month and 3.3% year over year in January, both above their December gains. The University of Michigan consumer sentiment survey for February indicated expectations for 4.3% inflation over the next year, up a full percentage point from its January reading. It isn’t clear whether the readings suggest a true signal or reflect noise amid policy uncertainty. However, we’re watching whether inflation is leveling off if not reaccelerating. The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, gained 2.8% year over year in December for a third consecutive month, still materially above the Fed’s 2% target.
3.75%–4%
Monetary policy rate
The Fed left its target for the federal funds rate unchanged in a range of 4.25%–4.5% in its first meeting of 2025. Chair Jerome Powell noted that the labor market and broader economy remain strong, meaning the Fed doesn’t need to rush into lowering its policy rate. Given recent strength in labor and inflation reports, Vanguard has pushed out its expectations for two 2025 Fed rate cuts from the first half of the year to the second half.
4.4%
Unemployment rate
The U.S. labor market showed continued strength to start the new year. The unemployment rate fell to 4.0% in January from 4.1% even after annual adjustments added 2.1 million people to the labor force, largely owing to immigration. Momentum in job creation has more than offset this dynamic, leading to the lower unemployment rate. In our base case, we foresee the unemployment rate rising marginally in 2025 to around the mid-4% range. We expect 2025 to be another year where the labor market’s trajectory is shaped by labor supply developments. Should supply constraints exceed what we’ve incorporated into our base case, risks would skew toward a tighter labor market, characterized by a lower unemployment rate, higher wage growth, and a greater inflation risk.
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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