Introduction
Since the pandemic, the U.S. economy has performed significantly better than other major world economies, and this trend continued in 2024. There are three key factors that drove the U.S. economic expansion last year: a healthy labor market, rising household wealth and solid consumer spending.
- More than two million jobs were added to the economy in 2024, and while unemployment ticked up slightly to 4.2% in November, it remains one of the lowest rates of the past 40 years. Meanwhile, labor productivity has risen 25% faster than the pre-pandemic average.
- Since 2022, household net worth has increased by 17%, driven by a bull market and rapidly rising homeowner equity.
- With low unemployment and rising household wealth, consumers continue to spend at healthy rates despite concerns of a pullback.
This year, we expect these trends to continue propelling the U.S. economy forward. President Trump likely will have some curveballs in store: we expect many to be unequivocally good for growth (e.g., lower taxes and reduced regulation), but others could hamper the economy, including the threat of another trade war or a mass deportation program that could disrupt businesses and reduce aggregate demand. Overall, however, we expect the U.S. economy to remain on solid footing this year, with moderate-to-strong growth, healthy labor markets, and inflation mostly in check. This should provide a positive environment for business investment and the equipment finance industry.
Here are seven predictions for the U.S. economy and equipment finance industry in 2025.
1. Rising household wealth and easing financial stress will keep consumer spending healthy.
In recent years, consumers have consistently surprised economists with their willingness to spend, even during periods of high inflation, low personal savings, and falling consumer confidence. In our article last year, we noted that rising financial stress would be a key factor to watch in 2024, as consumers were increasingly relying on credit cards to fuel spending growth. Indeed, the average annual growth rate for revolving credit was four times higher than in the eight years preceding the pandemic at the tme. Additionally, higher interest rates increased the cost of servicing that debt, raising concerns that consumers were 'out over their skis' and would soon begin to cut back.
Fortunately, some (though not all) of these concerns have stabilized or improved. The Bureau of Economic Analysis revised the personal savings rate upward from a worrisome 3.3% to a more typical 5.2% in mid-2024, and although it has since fallen again to 4.4%, it is only modestly below its typical range in the 2010s. Disposable income allocated toward debt is rising less rapidly and remains slightly below the pre-pandemic rate, and consumer confidence has improved markedly since hitting a historical low in 2022.
So, why is consumer spending still rising? One significant factor may be the increase in household wealth, which has grown by $13.5 trillion in 2024 alone. According to Federal Reserve researchers, wealthier consumers have been the main drivers of consumer spending growth, while spending growth among lower-income households has flattened since mid-2021. Credit card spending is also part of the story: revolving consumer credit growth jumped to a 14% annualized rate in October, its fastest rate in more than two years. Credit card delinquency rates appear to have stabilized, but this is something to keep an eye on this year.
2. The Federal Reserve will cut rates twice (at most).
In our article last year, we warned that “the ‘last mile’ [of inflation] could be more difficult than some may expect.” Although the Fed has cut interest rates by a full percentage point since September, the core Personal Consumption Expenditures Price Index (i.e., the Fed’s preferred inflation metric) only improved marginally in 2024, falling from 3.0% in at the beginning of the year to 2.8% in November.
As such, we expect the pace of rate cuts to slow, and we projected two cuts in the Foundation’s 2025 Annual Economic Outlook. Fed Chair Powell commented in November that recent economic performance was "remarkably good" and indicated that the Fed wasn't in a hurry to reduce rates so long as inflation remained above target and employment continued to post solid monthly growth. In December, he reiterated this “we’ll take our time” approach, stating that “when the path is uncertain, you go a little bit slower — not unlike driving on a foggy night or walking into a dark room full of furniture.”
3. The labor market will cool in 2025 but should remain healthy.
After three consecutive years of unusually strong job growth following the pandemic, growth slowed to 186,000 jobs/month in 2024. Interestingly, this is nearly identical to the 181,000 jobs/month average that occurred from 2016–2019. Meanwhile, unemployment is near multi-decade lows, real wages are rising, and both the quit rate and new hire rate have returned to typical levels.
At the same time, there are signs that job growth may cool in early 2025. Researchers at the Atlanta Fed reported recently that the difference between the number of net jobs created from newly opened businesses and the number of jobs lost from old businesses closing down has declined recently. Taking in combination with the fact that new business formation is also slowing, it is possible that a key driver of job creation could be losing steam. Relatedly, Atlanta Fed President Raphael Bostic recently noted that “excess vacancies” have fallen, a potential early warning sign that people who are laid off or otherwise not employed may find it more difficult to find work this year.
As such, we expect the labor market to cool gradually this year, reflecting a “low hire, low fire” dynamic.
A significant factor to watch is immigration. President Trump has vowed to crack down on illegal immigration and deport millions of people in the country without authorization. While there is broad political support for slowing immigration, most economists agree that immigration has bolstered the labor market and is a net positive to U.S. businesses. Indeed, in 2017, Business Roundtable released a study finding that an “Enforcement Only” approach to immigration reform in which legal immigration was restricted and millions of illegal immigrants were deported would shrink the economy by 3%, reduce employment by 6.9 million, and reduce personal income by 1.3% over a 10-year period. If there is a large-scale mass deportation effort this year, it could roil labor markets and slow economic growth.
4. Equipment and software investment will post another year of moderate growth.
Equipment and software investment growth got off to a slow start last year but picked up during the spring and summer. While we think activity likely slowed in Q4, equipment and software investment growth is still expected to come in at a solid 4.8% for 2024 in inflation-adjusted terms. We anticipate this trend to repeat in 2025: the year may start slow, but we expect activity to pick up over the course of the year.
The industry appears to recognize next year’s potential, as the Foundation’s Monthly Confidence Index hit a three-year high in November. The anticipated pickup is supported by lower interest rates and the expectation of better business conditions, stronger capex demand, more access to capital, and an overall stronger economy.
In the near term, momentum remains uneven across sectors. The Foundation-Keybridge Equipment & Software Investment Momentum Monitors indicate that eight of the 12 tracked verticals are demonstrating weak momentum relative to historical averages, including large verticals such as Trucks and Other Industrial Equipment. By contrast, Computers and Mining & Oilfield Machinery are showing strong signs of momentum.
5. The equipment finance industry should benefit from tax reform.
Key provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire in 2025. This has prompted Congress to revisit the current tax code in what is being dubbed the “Super Bowl of Tax.” The TCJA represents the largest tax reduction in nearly 40 years, but there are indications that the upcoming 2025 legislation could surpass that, as many tax experts report that all options are on the table.
While the law is complex and contains many provisions that could impact the industry in various ways, two of the larger issues in play are a potential lowering of the corporate tax rate for U.S. manufacturers and the potential reinstatement of full expensing for equipment purchases (i.e., bonus depreciation), which was part of the TCJA but began phasing out in 2022. Reinstating the bonus depreciation provision would likely stimulate higher investment activity as it did under the original law, but whether it will ultimately make it into the final law is unclear.
The main drawback to further tax cuts, of course, is their impact on the federal deficit and overall debt levels. With the debt-to-GDP ratio above 100% and rising quickly, we continue to worry about the long-run implications for the country’s fiscal health.
6. Industrial policy priorities will shift, with mixed effects on equipment finance firms.
The Biden administration directed hundreds of billions of dollars toward renewable energy, domestic manufacturing, and infrastructure development projects through legislation such as the Inflation Reduction Act (IRA), the CHIPS Act, and the Infrastructure Investment and Jobs Act (IIJA). However, despite this historic level of investment, several factors have dampened the promised economic effect. First, less than 17% of the $1.1 trillion in climate, energy, and infrastructure funding had been spent as of April 2024. While this share has surely risen over the last nine months, the speed of investment efforts has been frustratingly slow. Nearly 40% of new manufacturing investments under the IRA are delayed due to various regulatory hoops, slowing global demand, overproduction from China, and policy uncertainty.
Looking ahead, the Trump administration may attempt to rescind IRA funding and tax incentives to help finance a new tax bill. However, given that 80% of clean energy investments have been spent in Republican-held congressional districts, the votes to approve the withdrawal of funds may be difficult to secure. While a loss of IRA funds would be a headwind for some equipment finance firms (particularly those who deal in clean energy projects), we expect private markets to continue supporting these kinds of investments.
Meanwhile, the Trump administration is expected to revive public investment in U.S. oil and gas production. Oil and gas producers are likely to face fewer permitting and regulatory hurdles, which should result in greater equipment demand in that sector. Domestic oil production is already at an all-time high, largely due to improved drilling techniques and AI tools that have dramatically improved drilling output and efficiency. These technological advances are a double-edged sword for equipment manufacturers, however, as producers have increased production levels while reducing the number of active oil rigs.
7. Modest tariffs may have little effect, but an aggressive tariff regime could harm growth.
Throughout his 2024 campaign and post-election messaging, President Trump has made it clear that tariffs will play a significant role in his second term. Since the election, he has threatened a 25% tariff on Mexico and Canada, an additional 10% tariff on Chinese imports, and a 100% tariff on BRICS nations (Brazil, Russia, India, China, and South Africa) should they seek to de-couple from the U.S. dollar.
Most economists argue that tariffs distort markets, harm U.S. consumers, and lead to retaliatory measures that harm U.S. exporters. We believe that if tariffs are heavily implemented by the Trump administration, this will be the likely outcome. But we do not expect every threat to come to fruition: recent threats like those on Mexico and Canada are likely more about “setting a tone” for future negotiations. Indeed, Trump previously threatened a 25% tariff on Mexico in 2019, which was lifted after Mexico agreed to take stronger measures to curb illegal immigration.
While the specifics of future tariff actions remain uncertain, the pattern established in Trump’s first term suggests that broad-based tariffs on Chinese imports are highly likely, and tariffs on other trading partners, including the European Union, are in play. Imposing tariffs would likely trigger a reciprocal response, but even if tariffs aren’t enacted, the “will they or won’t they?” negotiating tactic creates uncertainty for U.S. businesses, many of whom have near-shored to Canada or Mexico since the pandemic.
The industry- and firm-specific impacts of a full-fledged trade war are difficult to predict, and it is possible that President Trump sees more value in threatening broad-based tariffs as a negotiating tactic than actually implementing them (and, for what it’s worth, there is some evidence that this tactic can be effective). Still, as the author of The Art of the Deal surely knows, a threat is not an effective negotiating strategy unless it is viewed as credible.