Questions? We've Got Answers 

Q1. How will a Trump administration and Republican sweep change our U.S. forecast?

We expect some of the first policy moves of the incoming Trump administration to be on increased tariffs and reduced immigration. Both will weigh on growth. Assuming campaign promises are partially implemented, we have downgraded our forecast for real GDP growth from 2.1% to 1.7% for next year (Chart 1). President-elect Trump's campaign agenda was focused on four key pillars: tariffs, taxes, immigration, and reduced regulation. Arguably the most significant, and immediate, economic policy change will be higher broad-based tariffs. Our analysis finds that if Trump's administration fully implements rhetoric from the campaign trail (i.e., tariffs of 60% on China, 10% on all other trade partners), it would create a mild stagflationary shock for the U.S. economy. This is not something any new administration wants, particularly during their first year in office. Even so, Trump has already come out swinging on tariff threats, with an impromptu announcement of escalation of 25% tariffs on Canada and Mexico, while upping the ante on China by an additional 10%. 

Time will tell on what actually transpires. If the past is any indication, any tariffs implemented would be removed or reduced as countries negotiate and/or amend existing trade deals. But that wouldn't completely mitigate the economic drag, particularly given the high propensity for proportional retaliatory tariffs during that interim period. Business margins and consumers will pay the price, which will result in some erosion of real household incomes. Depending on the size and scope of the tariffs, we estimate that the economic drag could shave anywhere from 0.25-0.50 percentage points (pp) from 2025 GDP growth. However, this estimate was done in the absence of the recent announcement, which would create a much larger economic drag double in magnitude, assuming retaliation by its neighbors.  

Immigration is the other area where Trump has more latitude to act independently and take early action. During his previous term, immigration levels fell from 1.0 million per-year in 2016 to 500 thousand by 2019. Through executive orders, we expect Trump to significantly increase border enforcement, reinstate his "remain in Mexico" policy, and declare "illegal immigration" as a national emergency, which will unlock funds for border wall construction. Relative to our previous baseline, this results in over 2.3 million fewer individuals entering the U.S. by the end of Trump's term. For 2025 alone, it shaves about 0.1 percentage points from growth. Should Trump also follow through with deportations, the economic drag becomes more meaningful and runs the risk of reigniting labor shortages, particularly across industries like agriculture, construction, retail, and leisure & hospitality due to a higher concentration of undocumented immigrant workers (Chart 2).

On the tax side, the first order of business will be to extend the expiring provisions of the 2017 Tax Cuts & Jobs Act. However, this has no impact to our forecast because we had long assumed the sunset clause would not occur. Only an expansion and/or addition of new provisions would result in forecast changes. While Trump has campaigned on several additional tax reductions, these require Congress to pass legislation. Although the Republicans control both the Senate and House, a thin majority in the latter means near-unanimity among GOP members. This could prove challenging amidst a ballooning deficit. Given the uncertainties of what Congress will agree to pass, we will reserve judgement within the forecast until legislation comes to pass. 

Lastly, the high potential for deregulation, particularly across industries like energy and finance, offers some upside risk to the forecast. However, it is difficult to quantify and is one reason why we chose less aggressive downgrades in other aspects of policy, like tariffs and immigration. We will continue to adjust our outlook as new policies are announced once the new administration takes office. Stay tuned! 

Q2.  Financial markets had a strong reaction to the Trump sweep. Is our outlook for Fed policy and bond yields likely to shift?

Investors cheered the election of President Trump and the red wave taking over Congress. The S&P 500 is up approximately 5% on hopes that lower taxes and less regulation will be a boon to corporate profits. At the same time, bond yields surged higher on expectations that wider government budget deficits, tariffs, and slower population growth will force inflation higher. Higher inflation expectations have also led markets to pare back expectations for Federal Reserve rate cuts. 

We agree that the Fed will have to tread more cautiously should Trump follow through on his tariff rhetoric. We forecast the central bank will cut by another 25 bps in December and January, before shifting to a pause-cut-pause path thereafter (Chart 3). This means the Fed will get to our 3% neutral interest rate view in the first half of 2026, about six months later than initially forecasted. This will keep bond yields elevated by about 30 bps through next year relative to our pre-election view, tightening financial conditions and cementing the U.S. dollar at its current high level.

 

 

Q3. What are the anticipated impacts on the U.S. consumer?

The key policy plans outlined in question 1 would affect consumers in a few ways. In a nutshell, higher inflation reduces consumer purchasing power, compounded by higher interest rates relative to the counterfactual baseline. The impact ripples through demand for loans, such as autos. Lastly, a sharp reduction in the population size relative to our pre-election forecast, further weighs on economy-wide consumer demand. Fortunately, healthy gains in consumer balance sheets due to increased home equity and healthy gains in financial assets provide some offsetting cushion. 

So far, consumer spending has been remarkably resilient, defying our expectations time and time again. Once again, American households in the third quarter put peer countries to shame, with spending accelerating at its fastest pace in a year and a half at nearly a 4% q/q pace – double its trend-pace. Looking ahead to the fourth quarter, we expect spending growth to hold close to 3%, with short-term boost from the clean-up and rebuilding efforts following Hurricanes Helene and Milton.

As noted in our recent report, there are some good reasons why consumers have defied expectations. Annual data revisions to income and spending revealed a significant upgrade in personal disposable income, lifting growth from a benign 1.1% annualized rate in H1-2024 to a massive 4.2% (Chart 4). Likewise, the savings rate also benefited from a large upgrade, which revealed households were still sitting on excess savings previously believed to have been eliminated. Simply put, the data revisions created a new narrative. Household finances are in a better shape than the original data led us to believe. 

However, this hasn’t changed the trajectory, despite a higher watermark as the starting point. Savings are still being depleted. In combination with a cooling labor market, income growth is slowing. As such, even prior to Trump’s victory, we were expecting the pace of spending to moderate in 2025. Adding in headwinds from higher inflation and interest rates has caused us to shave 0.3 percentage points from consumer spending growth next year. However, we think it’ll still put in a good showing at 2-2.5%. Ultimately, American household balance sheets are strong. The amount of home equity has doubled in the last seven years to $35 trillion. Financial asset gains have also been good, with valuations increasing by 30% in the last four years. Wealth in many cases is not as liquid as personal savings in bank accounts and can not be tapped as readily as cash. Still, the wealth effect can provide a tailwind to consumer spending even as excess savings dwindle, particularly if interest rates decline further, making it cheaper for households to tap into their home equity.

Q4. Where does this leave the prospects for U.S. housing?

Significantly eroded affordability has been at the heart of the weak housing recovery for several years. While prospects of lower interest rates had us hopeful that some rebound in housing activity could take hold in early-2025, the recent leg higher in Treasury yields has pushed back on that narrative. Over the past month, the 30-year fixed mortgage rate has increased by nearly 100 bps to 7% or only 30 bps below where it started the year (Chart 5). Unsurprisingly, home sales have mounted no recovery, and remain more than 30% below their early-2022 pre-Fed tightening levels. Over the near-term, we expect that sales will tick a bit lower and stage only a modest rebound in the first half of next year. 

Poor affordability has certainly been the biggest constraint on home sales, but limited supply has also been an obstacle. In the face of a multi-decade high in mortgage rates, many "would-be" sellers would face a near doubling in their next mortgage by selling their existing property. This lock-in effect has constrained inventories and supported upward pressure on prices. We don’t think the tables will turn until mid-2025, after the Federal Reserve gets another 75 bps in interest rate cuts under its belt and owners are more enticed to list their homes. 

But we've been fooled by the housing recovery in the past, and the road ahead is not set in stone. Should interest rates stay persistently higher, it could meaningfully impact the timing and trajectory of the recovery. It's also worth mentioning that even once the Fed normalizes its policy rate, mortgage rates are likely to settle at a level that's nearly 200 bps above 2019 levels. With home prices still nearly 50% higher than 2019 levels, affordability is not returning to pre-pandemic levels. Homeownership will require an increasingly larger share of household's income.

Q5. What are the risks to the global outlook as trade faces greater headwinds? 

Tariffs will enact a higher cost of doing business and greater uncertainty to the global outlook. At the core, tariffs are a sales tax on the consumption of foreign goods that raises prices and reduces real incomes on the home front. The direct effect manifests in depressed export activity abroad. The indirect effects layer uncertainty on global investment flows, as decisions about production and supply chains are re-evaluated. Neither avenue boosts growth in the near-term. 

More broadly, the rest of the world will not sit idly by while their products are affected. The European Union is discussing targeted retaliatory tariffs. China, conversely, has developed an arsenal of non-tariff measures to be part of their response. These include new laws to counter sanctions efforts, the ability to target foreign entities acting in detriment to national interests, and export controls on key goods. The extent to which these are deployed will depend on the punitive level of new tariffs and trade barriers. However, China may be reticent to fully implement all these measures, as it's economy struggles to gain traction and it is already the focus of trade disputes with other major partners. The risk of further alienating businesses when investment flows into the country are tapering off is likely to be weighed against the benefits of retaliation. Nonetheless, a full-fledged response could result in shortages of key inputs, delivering a uniquely 21st century supply shock. 

Lastly, in the past year, many nations have gradually shifted to fiscal restraint, trying to offset pandemic era borrowing. This trend could be reversed if growth prospects are materially downgraded. Likewise, governments may feel compelled to provide domestic support to businesses and households to counter the negative effects of tariffs. For instance, Germany’s manufacturing sector is already struggling with weak demand and high input prices. The economy has stalled for two years, as government borrowing limits remain in force. The risk of a third year of stagnation could tip the scales towards fiscal spending, and some needed public investment.