By many measures the U.S. economy is in good shape. Unemployment remains low at 4.1% and the nation’s Gross Domestic Product has grown consistently since the first half of 2022. U.S. GDP increased 3.1% year-over-year in the third quarter, 3% in the second quarter and 1.6% in the first quarter of 2024. For the fourth
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Economist Mike Knetter, strategic advisor to the University of Wisconsin Foundation.[/caption]
BizTimes: As we head into 2025, what’s your take on where things stand for the U.S. economy?
Knetter: “The U.S. economy had a much more robust recovery from the pandemic disruption than any other large economy. Growth remains solid, powered by consumer spending, unemployment is low and inflation is moving slowly toward the Fed target. The unhappiness is mainly a consequence of the higher level of prices caused by the surge of inflation in 2022-23.”
Trump is promising major changes and certainly seeks to shake things up, with the support of a Republican-controlled Congress. Let’s examine what he has in store, starting with tariffs. What do you expect Trump to do with tariffs and what impact will that have on the economy?
“I think the threat of tariffs will be used to accomplish some foreign policy objectives with Mexico and Canada, mainly related to border integrity and drug trade. The situation with China is harder to predict. I expect the U.S. to attempt to defend its technological edge by limiting exports of sensitive technology to China and potentially limiting Chinese imports of advanced manufactured goods such as electric vehicles. Tariffs are a tool to achieve the latter. Of course, we gained our technological edge by exposing our firms to foreign competition so it’s not clear this is a wise path, but it sounds appealing to many, including those industries that will benefit from protection.
“Substantial tariffs on less sophisticated Chinese products would add to inflationary pressure and likely achieve little benefit to the nation or consumers. These lower-value goods aren’t produced in the U.S. so our firms would not benefit. The administration likely knows this, and I am hopeful some constructive dialog will produce some diplomatic wins that allow the administration to declare victory without huge tariffs.”
Trump has promised to aggressively go after illegal immigration and says undocumented immigrants will be deported. To what extent do you expect him to do that and what impact could that have on Wisconsin’s labor force?
“I expect this to be another area where the bark is greater than the bite. There may be some deportations, but mass deportation of undocumented immigrants would make the labor market much tighter in agriculture, food processing and leisure and hospitality. That would hurt supply conditions and add significant inflationary pressure to the economy.”
Retail gas prices in the Milwaukee area are comfortably below $3 per gallon. But with Trump promising to “dill baby drill,” will we see a significant increase in oil supply and a further decline in fuel prices?
“I expect that we will see lower prices.”
Trump says he plans to extend his 2017 tax cuts. Do you expect to see any other changes in federal tax policy?
“The tax cut extension will be a top priority, but I don’t expect much beyond that. The House majority is razor-thin, making other initiatives hard to pass.”
Elon Musk will lead a new Department of Government Efficiency (DOGE) to recommend major cuts to federal spending. What do you think will come out of that and how could big federal government spending cuts impact the economy?
“Government programs face several obstacles to efficiency including: lack of competition, need for excessive compliance oversight, and the incentive for agency employees to keep programs running beyond their useful life. DOGE will have difficulty making these obstacles disappear. More likely, some things could be eliminated and some technology improvements could streamline operations or compliance.
“I don’t expect big cuts to come out of this. Big cuts would require tackling entitlements or defense. Those areas may grow. But it’s possible to see some good come out of this exercise. Others have tried similar things (Al Gore as VP comes to mind) with little impact, but Musk is a big thinker and I would not discount the possibility that this effort will be different.”
What are the most significant regulatory changes that you expect from the second Trump administration?
“Energy deregulation likely to be the biggest. Digital currency may also make headway.”
Trump’s cabinet selections created quite a stir. One of the most noteworthy was that of Robert F. Kennedy Jr. as secretary of Health and Human Services. Based on his comments in the past, big changes could be coming for vaccine requirements, and for regulation of the food, pharmaceutical and chemical industries. Do you have any idea what to expect from an RFK-led HHS?
“He is a disruptor who will question conventional wisdom in all of these areas with little regard for special interests and perhaps research scientists. The former is a positive and the latter is a negative, in my opinion.
“I don’t have a good idea about what to expect really. He is a wild card but Aaron Rodgers maybe should have said yes to being his VP candidate.”
The Federal Reserve has traditionally operated independently of political influence. But Trump has indicated a desire to influence The Fed’s policy on interest rates. How do you think that will play out and is there reason to be concerned about a politician trying to influence the Fed?
“Politicians have occasionally done this in the past but more quietly. Trump is more open about it. I’m moderately concerned that this will make the Fed less vigilant on inflation.”
Speaking of the Fed, what are you expecting them to do with interest rates in 2025?
“I don’t expect as many cuts as markets are pricing in. I think the neutral rate of interest is a bit higher due to the bias toward inflation that tax cuts, tariffs and pressure on immigrants will create.”
What level of inflation do you expect in 2025?
“We should get down to 2.5% core by year end. Still above target.”
What’s your GDP prediction for 2025?
“Another year of 3% growth.”
How about a stock market prediction for 2025?
“We are again at lofty valuations but some of that rise was probably due to firms being able to pass through inflation. I’d expect a year of 8% growth in equities which is close to long-term average. But lots of variability around that forecast as is always the case.”
Any concerns about the economy slipping into a recession in 2025?
“Not without some big, unexpected shock. “
Could AI lead to an economic boom like the dot-com bubble?
“Yes, and I think that’s part of the reason the 2024 economy exceeded expectations.”
Anything else that I’m missing?
“Buckle up. It won’t be a boring year.”