Economic Outlook for Q1 2025
Quarterly Economics Briefing–Q1 2025
Posted Date: March 19, 2025
In this edition, the release schedule has been shifted and the publication has been renamed to match the current quarter that it is being released in. While the naming has jumped from Q3 2024 to Q1 2025, you can still expect all four quarterly releases in 2025.
Key Themes and Takeaways
- Most aggregate data showed a strong US economy in 2024; however, perceptions of economic health are far more mixed.
- The slowing labor market and moderate trend in medical inflation are key items we are watching for workers compensation in 2025.
- Elevated uncertainty in 2025 supports the cautious stance on the economy that we moved to in late 2024.
A Review of 2024 and Look Ahead to 2025
“It was the best of times, it was the worst of times…”
The opening line of Charles Dickens’ literary classic, A Tale of Two Cities, may not be the first thing that comes to mind when thinking about 2024’s economy. As we look back on the year, however, the description is quite apt. Gross domestic product (GDP) growth outperformed expectations, the unemployment rate remained low, and inflation decelerated during the year. Going further: household incomes rose, the Fed started lowering interest rates, and the stock market produced outsized returns. However, despite strong economic indicators, public perception of the economy remained largely negative.
In this brief, we will review how the economy performed during 2024, compare it to people’s perceptions of how the economy performed, and explore the mismatch between the data and perception. Then, we will dust off our crystal ball and explore what the future might hold for the economy and workers compensation for the rest of 2025.
It Was the Best of Times
Let’s begin with the objective numbers.
Real GDP grew 2.5% in Calendar Year 2024. While that was slower than 2023’s 3.2%, it is above the 2.1% average over the previous 20 years and starkly contrasts forecasts for a 2024 recession.
The economy added about 2 million jobs in 2024, slightly lower than the 2.6 million added in 2023 and similar to the annual average employment gains seen in the five years prior to the pandemic. The unemployment rate averaged 4.0% during the year. While this is slightly above the 2023 average of 3.6%, it is much lower than the 5.8% average over the previous 20 years and far better than many pre-pandemic forecasts of a full-employment scenario. Again, this starkly contrasts forecasts for a recession that were made throughout the year.
Consumer Price Index (CPI) inflation grew 2.9% over the course of 2024, compared to 3.4% in 2023 and 6.5% in 2022. With inflation moving lower, the Federal Open Market Committee (FOMC) began lowering the benchmark interest rate in late 2024 as well.
The S&P 500 index of stocks increased by 23% with a total return (including dividends) of 25%. This performance nearly matched 2023’s 26% total return and capped off one of the best two-year periods in history. The average annual total return of the previous 20 years is 10.3% for comparison. The index closed at a record high 57 times in 2024.
When you look at the objective numbers, it’s hard to argue for any conclusion other than the economy was great in 2024.
But the numbers are not the only thing that matters.
It Was the Worst of Times
During our State of the Economy presentation at our Annual Insights Symposium in May of 2024, we discussed the “vibecession,”1 a simple idea that the economy might not feel as good as the numbers say it should. At the time, we, as well as many other economists, believed that the vibecession was coming to an end. The economy was continuing to outperform expectations and sentiment was trending up. However, the November 5, 2024 election revealed unmistakable concerns about the direction of the country, hinging in part on voters’ skepticism about the economy.
1 State of the Economy and Impact on Workers Compensation, Stephen Cooper, Annual Insights Symposium, May 15, 2024.
Just 31% of interviewed voters agreed that the nation’s economy was excellent or good, despite the favorable story painted by the aggregate numbers. The vibecession was not yet over. Why were perceptions of the economy so starkly different from the data?
The Economy’s Strength Depends on Perception
Most economic statistics are aggregates. They combine data taken from across the entire country. Meanwhile, individuals’ views of the economy are personal, localized, and can be emotional rather than statistical. Taking a closer look at some of the most important economic statistics, mismatches between perception and reality become more apparent.
First, let’s begin with how we measure the overall economy: real GDP. Real GDP is a measure of all goods and services produced in the economy, adjusted for prices, and is, by its nature, impossible for any one individual to perceive. Going a step further, the way economists measure real GDP is through dollars spent, with household spending making up roughly 70% of the entire economy.
Throughout recent history, there has been a relatively strong correlation between growth in real consumer spending and consumer sentiment. Said another way, typically when people buy more in real terms, they usually feel pretty good about it. In 2024, however, real consumer spending growth accelerated throughout the year while sentiment declined. People were purchasing more goods and services, for the same inflation-adjusted prices but feeling worse about it.
Inflation Is Not the Price, but How the Price Is Changing
What is likely a major contributor to that bad feeling is the second important mismatch between perception and reality: inflation. Contrary to popular belief, inflation is not a measure of how expensive things are. Instead, it’s the rate with which things are getting more expensive. When people hear that inflation is trending down, that does not mean that goods and services are getting cheaper. It instead means that goods and services are getting more expensive at a slower rate.
Near the end of 2024, year-over-year inflation was running at roughly the same pace that it was in early 2020, just before the pandemic. Statistically speaking, price growth in January 2020 was around 2.5% over the previous 12 months, while price growth in October of 2024 was also around 2.5% over the previous 12 months. However, thanks to prior inflation, the October 2024 level of prices for all goods and services was over 20% higher than in December 2019. The rapid rise in prices during the pandemic and recovery continues to pose sticker shock for shoppers. The pace of annual inflation may be moving back to a more comfortable level, but everyday purchases remain significantly more expensive than they were just a few years ago. Wage growth has also risen faster than historical averages in this period, but even if these effects roughly cancel out, it may not feel like it.
More recently, however, inflation appears to be once again on the rise. While it briefly slowed to a pre-pandemic pace in Q4 2024, inflation moved back up to 3.0% in January 2025. While this reversal in the trend might cause some concern for the overall economy, the inflation story for workers compensation has been different. According to our most recent Medical Inflation Insights report,2 medical inflation by every metric that we track softened into the end of 2024.
2 Medical Inflation Insights, NCCI, January 28, 2025.
From the “Great Reshuffle” to the “Great Stuck”
Last, but certainly not least, let’s examine the labor market, the most important segment of the economy for workers compensation. In terms of the numbers: job growth of around 2 million, wage growth of about 4.0% (meaningfully above pre-pandemic averages), and low turnover are all positive indicators for workers compensation, both in terms of premium growth as well as downward frequency pressure from fewer low-tenured workers. But that last point—lower turnover—is an important facet for the broader labor market story.
In past issues, we have discussed the quits rate from the Bureau of Labor Statistics’ (BLS) Job Openings and Labor Turnover Survey (JOLTS). This is the number of workers voluntarily leaving their jobs in any given month as a percentage of the overall workforce. The quits rate is commonly cited as a measure of worker confidence in the labor market, with more workers quitting when they expect an easier time finding a new job. A decline in the quits rate has several implications for the labor market and for workers compensation.
Companies base hiring plans on a combination of growth needs and an expectation of natural turnover. When turnover exceeds these expectations, like in 2022 at the height of the “Great Reshuffle” period,3 hiring must be increased to fill the extra empty seats. This increases competition for workers and puts upward pressure on wage growth. On the other hand, if turnover unexpectedly slows, a company may find itself with too many workers, leading to a slowdown in hiring or potential layoffs, reducing competition for workers and, subsequently, wage growth. Overlaying wage growth on top of the quits rate shows a strong correlation between the two. Without a reversal in turnover trends, wage growth in 2025 may continue to trend down on lower competition to attract and retain top talent.
3 The Great Reshuffle in Labor Markets, Leonard F. Herk, Annual Insights Symposium, May 11, 2022.
Better, Worse, or More of the Same? A Look Ahead to 2025
Long story short, the economy in 2024 was decidedly great, or bad, or kind of okay, all depending on whether you are looking at the data, relying on perception, or looking at some combination of the two. So, with this as a backdrop, what does it mean for the economy in 2025?
The good and bad news for 2025 is that the economy will likely look similar to 2024. Taking a quick glance at median forecasts from Bloomberg’s survey of economists, real GDP in 2025 is expected to grow between 2.0% and 2.5%, inflation is expected to remain near 2.5% to 3.0%, the unemployment rate is forecast to change little from around 4.0% and, finally, employment growth is expected to continue slowly moderating while wage growth remains firm between 3.5% and 4.0%. The numbers all make sense as continuations of 2024 trends. What may be seen as a surprise, however, is a forecast probability of a recession in 2025 at just 20% to begin the year, sharply below the 50% forecast at the beginning of 2024 and the 65% forecast in 2023. For context, a 15%-to-20% probability of recession is consistent with the baseline for any given year—with historical recessions happening once every seven to eight years on average. With that being said, another famous quote comes to mind: “Climate is what we expect, weather is what we get.” There are always possibilities for destabilizing shocks that can lead to unexpected economic changes.
Key Economic Trends to Watch in 2025 for Workers Compensation
The first trend that we will be watching in 2025 is the slowing of the labor market, particularly in employment growth and turnover. While current forecasts expect 2024’s moderate slowing in employment growth to continue in 2025, risks remain on both sides. A reacceleration of the labor market, with increased hiring and increased turnover, would benefit the economy as a whole and could improve consumer sentiment. For workers compensation, a reacceleration would spur payroll and premium growth but may also come with some upward pressure on frequency trends from newly hired workers. On the other side, a further slowing or an abrupt deterioration would be a key risk to the health of the economy. After all, strong employment and wage growth have allowed for continued consumer spending growth, the main engine of GDP growth. Follow our monthly Labor Market Insights reports to keep up on the most recent developments in the labor market and their implications for both the broader economy and for workers compensation.
Medical inflation, a close second place as the most important area of the economy for workers compensation, will be another key area that we are focused on in 2025—more specifically, the moderating trend in the second half of 2024 that we highlighted in our most recent Medical Inflation Insights report.4 The Centers for Medicare and Medicaid Services forecasts that price growth in the Personal Health Care index, a similar metric to our Workers Compensation Weighted Medical Price Index (WCWMI), will be 2.6% in 2025.5 Should this forecast hold true, based on the relationship between the two indicators, we could see the moderating trend hold in 2025, with growth in the WCWMI remaining near current levels for the year ahead.
4 Medical Inflation Insights, NCCI, January 28, 2025.
A third key trend we are watching for workers compensation is the interplay between the Federal Reserve and longer-term interest rates. While the Fed cut benchmark interest rates by 100 basis points, or 1%, last year, longer-term yields have been volatile. When calculating the present value of future workers compensation liabilities, typically a longer-term yield (such as the 10-year Treasury) is used as the discount factor. With the economy strong, inflation still above the Fed’s target, and other factors now coming into play, longer-term yields may remain elevated and lower the present value of future workers compensation liabilities.
Finally, the new federal administration has promised significant changes to policy over the coming years. These include potential changes to tariffs, immigration, regulation, and tax law as well as many other changes that could be impactful to the economy and workers compensation. The overall impacts to the economy from any or all of these proposed policy changes are difficult to predict at this time as they will depend heavily on the details and implementation. Over the coming quarters, we will revisit these topics and assess any such enacted policies for potential impacts to the economy and workers compensation. The significant uncertainty that exists supports the more cautious outlook for the economy that we transitioned to late last year.
Conclusion
By most headline numbers, the economy in 2024 was great. Beyond the numbers, the story was much more complicated. For workers compensation, the story was more in line with the headline numbers. Wage growth kept payroll and premium growth elevated, while slowing in labor market turnover may have benefited frequency trends. As we head into 2025, early forecasts suggest the economy will take its momentum from 2024 into the new year. However, there is significant potential for change, in part due to the new administration and its proposed policies. Uncertainty is high, but one of the few confident predictions we can make at this time is that 2025 will likely be an interesting year for the economy.