State of the State 2025: Tariffs, trade policies cloud 2025 economic outlooks

Most key factors of economic activity in the U.S. and Arkansas economies are expected to moderate in 2025 compared with 2024 and 2023 trends. The broader U.S. economy is expected to enter its sixth year of expansion even with a slower pace of growth.

Real U.S. gross domestic product (GDP) was up 2.4% in 2024, which was just below the 2.9% gain in 2023, according to the U.S. Bureau of Economic Analysis (BEA). A significant part of the 2024 and 2023 gains were from consumer spending.

“The increase in consumer spending reflected increases in both services and goods,” the BEA noted in the full-year report. “Within services, the leading contributor to the increase was health care. Within goods, the leading contributors to the increase were recreational goods and vehicles as well as motor vehicles and parts.”

Arkansas’ third quarter real gross domestic product (GDP) of $149.1 billion grew at an annual rate of 6.9%, the most of any U.S. state, according to the BEA. The third quarter report from the states is the latest data available. Fourth quarter and full-year data are set to be posted March 28.

“Agriculture, forestry, fishing and hunting, which increased in 25 states, was the leading contributor to growth in five states including Arkansas, Alabama and Mississippi, the states with the largest increases in real GDP,” noted the BEA report.

Arkansas also ended the year on a positive jobs note. The number of employed in Arkansas during December was an estimated 1,368,644, up 34,626 jobs, or 2.6%, compared with December 2023, according to the U.S. Bureau of Labor Statistics (BLS). Arkansans without jobs in December totaled 47,708, down 6% compared with 50,736 in December 2023. The biggest year-over-year sector gains were in education and health services (11,000 more jobs), professional and business services (5,400 more jobs), and manufacturing (3,600 more jobs).

But it’s uncertain if national and state trends of moderate growth will continue. Estimates of U.S. GDP growth range from 1.5% to 2.7%.

“The unpredictability of the current administration’s policies looms large over the outlook,” noted a statement from the closely-watched The Conference Board. “While the U.S .economy is set to start 2025 on strong footing after a year of surprisingly robust growth, a combination of proposed policies will likely weigh on growth and leave inflation elevated as the year progresses, resulting in a more patient policy stance from the Fed.”

Dana Peterson, chief economist at The Conference Board, said during a Jan. 31 presentation at the Arkansas Business Forecast Luncheon in Rogers that the global economy will grow about 3.1% in 2025, and she expects U.S. growth at 2.8%. She said trade wars, especially with the announced tariffs, will have a slowing effect on the U.S. and global economy.

Dr. Michael Pakko, chief economist and state economic forecaster with the Arkansas Economic Development Institute, believes economic growth will dip slightly in 2025.

“The current stance of policy will keep housing and other interest-sensitive markets from significantly rebounding, and the pace of economic growth overall is expected to be slower in 2025 than in 2023 and 2024,” he noted. “In particular, employment growth is expected to slow, with monthly gains in U.S. payrolls falling to below 100K per month. Employment growth in Arkansas could slow even further, with growth over the year amounting to less than 1% over the course of the year.”

Pakko, who says the national economy is “in a mature-cycle growth phase,” predicts the U.S. GDP will fall below 2% in 2025, and the Arkansas GDP will be just above 1% by the end of 2025.

He also believes the U.S. unemployment rate, which was 4% in January, could reach a 4.9% high in 2025. The Arkansas unemployment rate, which was 3.4% in December, will rise but likely remain below 4%, according to Pakko.

“Most of the (Arkansas) job growth over the next year will be in the service-providing sectors, particularly in education and health services and business and professional services. Employment growth in manufacturing and retail trade will be zero or negative over the year,” Pakko noted.

He is uncertain about the impact of enacted and threatened tariffs by President Donald Trump’s administration.

“If tariffs are actually raised significantly, the upward pressure on import prices could delay the slowing of inflation, and hence keep the Fed on the fence when it comes to further interest rate cuts,” Pakko said. “On the other hand, if we start to see re-onshoring of manufacturing, the outlook for employment may turn out to look better than presently expected.”

The economists at Deloitte are optimistic about the 2025 economy but suggest tariffs and other Trump policies, if fully enacted, will eventually reduce U.S. economic growth.

“This combination of policies should allow real GDP to grow by 2.4% in 2025 before slowing to 1.7% in 2026,” according to a Jan. 24 report from Deloitte. “The negative economic effects of tariffs, such as higher inflation and weaker real GDP growth, are not expected to be fully felt until 2026 as per our baseline scenario.”

Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and around mid-year to provide an update on the state’s economy. Link here for the State of the State page and previous stories.