The economy is heading into 2025 on solid footing, but changes in Washington and geopolitical risks abroad raise questions

In 2024, many business leaders expressed their highest level of optimism in years: According to KeyBank’s Middle Market Sentiment survey, 78% of middle market business owners and executives characterized the outlook for their companies over the next 12 months as excellent or very good. Will executives be able to ride this wave in 2025, or will it crash?

Heading into 2025, a variety of factors could reinforce or derail positive sentiment among business leaders, including shifts in political power, decreasing interest rates, geopolitical turmoil, and others.

One thing these factors share: Consumers can't control them. With consumer spending comprising roughly 70% of U.S. gross domestic product (GDP), they often play an outsized role in the American economy. Fortunately, consumer spending has been supported by a stock market at record highs, a strong job market, and wage growth outpacing inflation. As KeyCorp CEO Chris Gorman pointed out during a recent CNBC appearance, “Anyone who wants a job has one, and people who have jobs are making more money than they were last year.”

But while the economy looks great on paper, prices for groceries and other necessities remain about 20% higher than they were two years ago. Particularly at the lower end of the income spectrum, consumers are still feeling that strain, as evidenced by rising debt and an increase in credit card loan delinquencies.

The economy runs on more than consumer confidence 

Although paramount, consumer confidence will not be the only factor affecting the economy in the coming year. The Federal Reserve’s lowering of interest rates also bodes well for the overall economy. As rates come down, inflation will likely continue to moderate toward the Fed’s 2% target. And while this means prices will increase more slowly, disinflation (widespread declines in prices) is unlikely.

Additionally, changes in Washington are likely to affect the economy as well. With Donald Trump beginning his second presidential term in the first month of 2025 and the balance of power shifting in Congress, certain policy priorities are likely to have economic implications, including immigration policy, tariffs, and deregulation, among others.

While some economic trends will be consistent throughout the U.S., regional characteristics and conditions can lead to economic variations, too. For example, looking ahead to 2025, businesses in the Mountain West region are positioned to outperform other parts of the country due to a steady stream of workers migrating there from more expensive West Coast cities. In the Midwest, labor disputes could have consequences for businesses, while tourist destinations in the Sun Belt may feel the effects if consumers pull back on discretionary travel spending. In the Northeast, economic growth is tied closely to the financial industry, due to a high concentration of financial firms in the region.

Black swans, interest rates, and the cost of doing business

The U.S. economy grew more quickly than expected in 2024. However, it is likely to slow down in 2025, though a recession does not appear to be on the horizon for the coming year. On the question of whether there will be a “hard landing” or a “soft landing” in response to the recent period of elevated interest rates, Gorman said, “I don’t see a soft or a hard landing in the next 12 months or so. The economy is clearly slowing; the question is, from here, does it slow more, or does it start to pick up?”

In addition to slower growth, unpredictable “black-swan” events could pose risks to the economy and the business sector in the coming year. These might include an unexpected stock market correction, a spike in oil prices because of intensifying conflict in the Middle East, unrest in the labor market, and natural disasters.

For example, 2024’s Hurricane Helene is estimated to have a $16 billion economic impact in North Carolina. The increasing frequency and severity of natural disasters such as storms, flooding, and wildfires is a long-term issue that will require businesses to adapt over the next 10 years or longer, particularly as insurance providers evaluate their risk exposure and adjust accordingly.

On the other hand, relief from high interest rates will benefit companies throughout the economy. Due to the large proportion of short-term, floating-rate corporate debt, elevated interest rates have been particularly painful for businesses. As interest rates decline, many sectors will also see an uptick in performance. 

The high costs of labor, raw materials, and energy that have plagued businesses in recent years are also subsiding. Heading into 2025, oil prices are low, although intensifying conflict in the Middle East could cause them to rise. There is also more equilibrium between supply and demand in the labor market, which helps companies manage labor costs. However, if President-elect Donald Trump fulfills his campaign promises to restrict immigration and enact mass deportations, labor costs may rise for businesses that depend on immigrant labor, such as many in the services industry.

International issues will also have implications for domestic businesses in 2025. In addition to the conflict in the Middle East potentially driving up oil prices, government policies that increase tariffs on imported goods could have detrimental effects on supply chains and inflation for some industries.

Critical trends and business investments for the year ahead

This past year has seen a variety of occurrences and trends that affect U.S. businesses. Some of them, such as the U.S. dockworker strike and the evolving artificial intelligence (AI) landscape, may roll over to 2025 and beyond.

For example, in September 2024, U.S. dockworkers with the International Longshoremen’s Association initiated a strike that temporarily slowed activity at U.S. ports and exerted pressure on supply chains. While the union and the United States Maritime Alliance agreed to a tentative resolution, the extended contract will run out on January 15, 2025.

The parties need to negotiate a new contract that addresses outstanding issues before that date to avoid another strike. An additional strike may result in a shortage of goods in the marketplace because of supply chain issues and lead to increases in prices and inflation. The longer the strike, the likelier that it will have implications for the broader economy.

As businesses look to the year ahead, investments in technology should also be top of mind. CEOs remain highly sensitive to cyberrisk and will continue to invest in tools and technology to protect their enterprises. Finally, AI continues to evolve and present new opportunities and risks to companies. While large organizations are cautious about the risks involved with adopting AI, and thus slower to implement it at scale, smaller businesses are more apt to leverage it in the name of productivity gains. This means some workers could be subject to AI-driven layoffs, potentially affecting the job market.

An optimistic forecast — with a black-swan asterisk

The economic outlook for businesses in 2025 is bolstered by a still-strong consumer and declining interest rates. At the same time, geopolitical conflicts, potential policy-driven re-inflation, and unpredictable black-swan events continue to pose risks. However, with the recession concerns of the past few years mostly behind them, many business leaders have reason to approach the new year with a sense of optimism and opportunity.

To learn more, visit key.com/economicconditions.