Economic Forecasts for 2025: Anticipating Challenges with New Policies Under Trump Administration

In January 2025, Donald Trump is set to reclaim the presidency, and with it, he promises to implement a series of economic policies that are already generating significant discourse among economists and analysts. Among the proposed actions are substantial tariffs aimed at America's primary trading partners—namely China, Mexico, and Canada—along with aggressive immigration policies and tax reforms. The implications of these policies raise important questions about the near-future economy, particularly as various forecasts try to navigate the uncertainties that accompany them.

Forecasting Challenges in a Shifting Economic Landscape

The winter 2024 economic forecast released by UCLA Anderson economists outlines how these new policies are likely to shape not only the national economy but also the state of California. The challenge lies in the many moving parts of Trump's proposed policies. For example, the assumption of a 25% tariff on goods from Mexico and Canada, coupled with a 10 percentage point increase on tariffs for China, could lead to immediate ramifications for consumer prices and inflation rates.

These tariffs, economists suggest, will primarily lead to higher consumer prices, contributing to inflation that is projected to cross the 3% mark temporarily in 2025. It’s important to note, however, that these figures are based on anticipated policies which themselves may change in implementation due to legal or political constraints.

Additionally, the potential for mass deportations—up to one million undocumented immigrants per year—could lead both to labor shortages in sectors vital to the economy, like agriculture and construction, and to increases in wage levels as employers compete for a limited pool of workers willing to take on these roles. This dynamic creates a paradox where, on one hand, the economy could see falling GDP growth—predicted to tumble below 2% during the latter part of 2025—while on the other, there will be upward pressure on wages for certain types of employment.

National vs. California Economic Outlook

California is poised to experience particular challenges as it adjusts to national policies. Areas of uncertainty include the enforced withdrawal of millions of undocumented workers, who may either be deported or opt out of employment due to fear of deportation, which is critical in various sectors of the state's economy.

Moreover, there’s likely to be a renewed emphasis on H1B visa allocation for tech workers, which may benefit California's technology sector as the administration shifts focus toward tech growth and innovation. However, the overall impact of tax cuts from the Tax Cuts and Jobs Act of 2017—set to be renewed—may be muted in the short term as markets adjust to the new economic climate.

The forecast anticipates California's economic growth aligning with the national pace, albeit slowly, reflecting the complexities surrounding the policy transitions. For instance, unemployment rates are expected to average around 5.3% in Q4 2024, with slight fluctuations over the next two years.

While overall job growth may appear lackluster, non-farm payrolls are expected to gain traction, due in part to potential rises in construction and technology sector jobs facilitated by state policy.

As California navigates these changes, the ramifications on the housing market also warrant attention. Despite higher interest rates, a persistent demand for limited housing combined with policies favoring new construction projects creates expectations for a recovery that will begin to unfold gradually but is unlikely to resolve the overarching affordability crisis in the near future.

Conclusion: The Road Ahead

The anticipated economic adjustments under Trump’s administration are both complex and fraught with uncertainty. While national GDP growth may experience dips, California's economy, influenced by unique local factors, will also traverse its path with projected growth rates bearing the weight of national policies.

The UCLA Anderson Forecast serves as a notable reminder of the volatility inherent in economic forecasting, especially when navigating the promise of sweeping policy changes. As the nation gears up for these alterations, key stakeholders—including businesses, workers, and policymakers—are all left to ponder the ramifications of these developments on the economic landscape as a whole.