Macroeconomic Update: “Goldilocks” Economy Meets Policy Changes

By Phil Mackintosh, Senior Vice President, Chief Economist at Nasdaq and Michael Normyle, Senior Director, Economic Research at Nasdaq

Economy at a Glance

Figure 1: Key Indicators and Trends

U.S. and Other Developed Economies in “Goldilocks” Zone of Low Inflation and Unemployment

The U.S. and many other developed economies are entering 2025 on solid footing, largely avoiding recession last year. In the U.S.:

1. Headline PCE inflation is down to 2.6% p.a., near the Fed’s 2% target.
2. The unemployment rate has increased modestly from 3.4% to 4.1% – still among the lows of the last 55 years.
3. Yet the economy is growing at a solid pace, with real GDP expanding 2.8% in 2024.

We might say the U.S. came into 2025 in a bit of a “Goldilocks” state – not too hot (inflation and labor markets), not too cold (economic growth).

The U.S. economy has been supported by government spending, including big-ticket programs like the CHIPS Act and Inflation Reduction Act, and consumer spending. This is supported by fixed-rate mortgages partly insulating consumers from higher Fed rates, a healthy labor market driving real wage gains, and housing and equity asset appreciation increasing household wealth.

While many of these factors remain in place, companies need to prepare for potential changes from distinctly different policies under President Trump’s administration. This quarter, we’re going to focus on the three big, expected changes:

1. Tariffs
2. Immigration
3. Smaller Government

Experience from President Trump’s first term and Covid provide examples of what economic impacts we might expect this time around.

1. Tariffs likely to have smaller impact on inflation than many worry

We can start with tariffs, which were largely focused on China in President Trump’s first term.

Although tariffs increase the costs of inputs, evidence from President Trump’s first term find little to no impact on inflation. That’s partly because goods represent a small proportion of the U.S. economy (around 10%) and imported goods are a fraction of all goods.

It’s also because the added cost of importing from China pushed companies to change their suppliers or supply chains. Over time, this nearly halved China’s share of U.S. goods imports (Figure 2, red line) – which limited the inflationary impact of tariffs even more.

However, this has clearly changed how many companies operate, in some cases building new factories or staffing new office locations. The data shows this has benefitted countries that are China’s neighbors (Taiwan, Korea, Vietnam), as well as Mexico (“nearshoring”) and the Eurozone (“friendshoring”).

Figure 2: Share of U.S. Goods Imports

Note: 2024 data is year-to-date through October; Sources: Census, Nasdaq Economic Research

One difference in 2025 is that President Trump has proposed tariffs on a broader range of countries. Ultimately, we’ve observed that many economists expect President Trump to enter bilateral deals with countries, perhaps targeting those with larger net exports to the U.S. to close the trade deficit and fortify U.S. supply chains.

If this is the case, the Figure 3 shows the countries with the most trade (size of the country) and the largest U.S. trade deficits (darker red). Based on this, countries like Mexico, China, and Vietnam are considered the most likely focal points. And President Trump has already proposed even higher 25% tariffs on Canada and Mexico and 10% on China. 

Figure 3: U.S. Biggest Trade Deficits/Surpluses by Country

Source: HowMuch.net

2. Immigration restrictions could cause some labor shortages, boosting some wages

Another potential source of higher costs is immigration restrictions. The obvious impact from tighter immigration controls and deportations would be labor shortages, at least in some sectors of the economy.

An interesting parallel for this is looking at how Covid reduced the labor supply – although Covid likely affected far more workers than deportations will ultimately deliver. For example, during Covid:

1. An estimated 2.4 million people retired early (rather than risk getting sick).
2. Enhanced unemployment benefits let people hold out for the perfect job.
3. Visa issuance fell over 50% in 2020 and 2021 from 2019 levels as travel globally was restricted.

Combined, these led to significant labor shortages once the economy picked up. At the peak of the recovery, once vaccines became widespread, there were two job openings per unemployed person, compared in 1.2 in 2019.

With demand for a smaller pool of workers, people willing to switch jobs earned much better pay, which was called the “Great Resignation” at the time. As a result, wage growth increased to 8.5% p.a. in 2022 (Figure 4, purple line) for job switchers, and also increased for job stayers (black line).

As a result, data shows business wage costs increased 25% from 2020. This became a key factor causing the “sticky” inflation (stuck above 2%) we still see today.

Figure 4: Annual Wage Growth (3m Avg.)

Sources: FactSet, Atlanta Fed, NBER, Nasdaq Economic Research

By some reports, the U.S. has averaged about 1.4 million unauthorized immigrants per year since 2021, many of whom may not yet have joined the labor force. Even in the case of more widespread deportations, some industries are more reliant on unauthorized immigrants than others and would be hardest hit, including construction, agriculture, and hospitality (Figure 5).

Figure 5: Undocumented Immigrants Share of Workforce by Industry

Sources: American Immigration Council analysis of the 2022 1-year American Community Survey, Apollo

Higher wages needed to attract people back to those industries could add to inflation. Although, the consensus is that this would be far more modest than the wage inflation we saw in 2022.

3. Smaller government likely positive for company valuations

The last piece of President Trump’s platform includes a more limited role of government, such as:

• Easing regulations
• Lowering taxes
• Reducing government spending via the new Department of Government Efficiency

On net, it’s likely the government will still run significant deficits, supporting economic growth.

For companies, lower taxes should increase profits, which will help support valuations and stock prices. Not only does President Trump want to permanently enshrine his 2017 tax cuts, which are set to expire in one year, but he also wants to cut the corporate tax rate further to 15% from 21%.

Interestingly, the year after President Trump lowered the corporate tax rate to 21% from 35%, we saw a big boost to companies' earnings, from 11% p.a. in 2017 to 21% in 2018 (Figure 6, green bar). That’s close to a 1% increase in profits for every 1% cut to the tax rate.

Figure 6: S&P 500 Annual Earnings Growth

Data as of January 30, 2025; Sources: FactSet, Nasdaq Economic Research

The market may also be pricing in an uptick in M&A deals, which usually offer to buy shares at a premium to market prices, which would boost the valuations of attractive targets.

Even before any of these policy changes, analyst estimates show a strong earnings recovery in 2025, with growth of 15% p.a. for S&P 500 stocks (orange bar) coming from a broader range of companies.

Policy Changes Likely Net Positive for Companies

The market sees the net impact of potential impacts of policy changes as a likely positive for corporates.

The benefits from tax cuts, lower regulation, and government spending would be positive. While estimates suggest any boost to inflation from tariffs or higher wage costs from immigration restrictions will be limited.

In short, the economy in 2025 is well positioned to repeat the strength of 2024, provided the labor market and consumer spending hold up.

5 Questions Board Members Should Ask Now

1. What can we do to maintain and to expand margins if corporate tax cuts don’t come to fruition?
2. How might changes in immigration policies impact our hiring plans and are we prepared to manage this?
3. What is our M&A outlook, either as a target or acquirer?
4. As the Fed keeps rates higher for longer, do widening rate differentials provide international opportunities?
5. How is our business impacted by a strong dollar? A weak dollar?

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