When it comes to what Americans can expect for their wallets in 2025, one economist says the cognitive dissonance between inflation fears and actual spending habits will make for continued growth much like 2024.

Republicans’ strong showing in the November election reflected American’s dissatisfaction with economic policies, said Chris Thornberg, founding partner with Beacon Economics.

“We continue to live in a world where we’re constantly hearing tales of woe and inflation burden on an American public that is just out there partying its brains out,” Thornberg said.

Fears about economic security Republicans touted during the election don’t match up with consumers’ penchant for spending, shown by strong holiday shopping numbers and continually growing restaurant sales.

Predicting President-elect Donald Trump’s 2025 policies and how tariffs and mass deportations threats will affect the economy can be difficult to predict, Thornberg said. What he does expect is the American consumer and global faith in a strong stock market to continue to prop up the economy — at least for 2025.

But looming beneath growing employment and wages is a ballooning federal deficit that when popped, will throw the economy into turmoil in order to pay the government’s debts. Thornberg fears that in the coming years, the U.S.’s global creditors will begin reacting to the unsustainable way the federal government has been spending.

Trump’s recent calls to eliminate the debt ceiling show his true colors, in Thornberg’s eyes. And not even government efficiency efforts from the proposed Department of Government Efficiency can defeat politicians’ inability to actually make hard decisions about budget cuts.

Thornberg expects the deficit to continue to grow under Trump.

“The question is how long will global markets continue to fund our government’s excesses,” Thornberg said. “On that one, I have no idea. Could it last two years, could it allow six years? It’s a giant question mark.”

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Expect Higher Wages, High Employment for 2025

The ability and desire to spend paints a better picture of the economy than the narrative that affected voter sentiment, Thornberg said.

Retail sales during the 2024 holiday season rose 3.8% compared to last year, according to Mastercard’s annual SpendingPulse report. Restaurant spending also grew 6.3% compared to 2024.

“The holiday shopping season revealed a consumer who is willing and able to spend but driven by a search for value, as can be seen by concentrated e-commerce spending during the biggest promotional periods,” said Michelle Meyer, chief economist with Mastercard Economics Institute in a statement. “Solid spending during this holiday season underscores the strength we observed from the consumer all year, supported by the healthy labor market and household wealth gains.

Thornberg expects employment and income growth to continue.

“There’s still as many job openings as there are people looking for work,” Thornberg said. “There’s no particular sign that there’s anything particularly wrong in labor markets, and that generally is good for workers.”

Economists Expect Tariffs to Hit Consumers Hardest

The biggest impact on consumers’ wallets in 2025 could be — if Trump follows through with threats as he did in his first term — taxes on imported goods. The president-elect has insisted that exporters will pay for the proposed blanket 10% to 20% tariffs and 60% to 100% tariffs on Chinese-originated goods. But most economic models show it will be consumers who pay.

Trump has also singled out autos coming from Mexico. One-third of all vehicles priced below $30,000 are built in Mexico, according to the Wall Street Journal. Trump’s proposed 25% tariffs on goods from Mexico and Canada.

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Predicting Trump’s policies is hard considering how often they change, Thornberg said. Trump stated the ultimate goal of tariffs is to bring back competitiveness to American manufacturing. But with the strength of the dollar and the country’s low unemployment rate, making meaningful increases to the manufacturing sector will be difficult.

“Labor markets are tight, real wages are rising — what are we missing that we think bringing back manufacturing is going to replace?” Thornberg said.

Federal Reserve’s Balancing Act Means Rates Will Have No Significant Change

Thornberg expects interest rates to largely stay the same. And the Federal Reserve has indicated as much. To combat inflation, the Fed has been raising the federal funds rate and has been contracting the amount of money in the system.

At the same time, the Fed also needs to correct an imbalance of Treasury yields. For more than two years now, returns for short-term bonds have outpaced those of long-term bonds, something that disrupts borrowing.

Cutting the federal funds rate — the price that banks lend to one another — lowers short-term rates. But quantitative tightening policies will keep long-term rates high.

For the everyday consumer, that means continued 10-year Treasuries around 4% and corresponding mortgage rates in the mid-6% range, Thornberg said.

Persistently high interest rates could spell trouble for the car and new home markets.

Car dealers have been offering below-market interest rates to get vehicles sold. The same goes for new home builders.

“What the automakers and the homebuilders are doing is betting that rates are going to come down,” Thornberg said. “I hope to God that they’re hedging their positions because they’re going to be shocked when they don’t.”

Homebuyers with attractive short-term teaser rates may find the stubborn market keeps them from refinancing at a better one when the term starts to balloon. For car dealers though, it may be the dealerships that have to start taking losses from subsidizing low rates.

But strong margins on car sales will help cushion that blow, Thornberg said.

Keep An Eye Out for Weaking Stock Market

The U.S.’s ballooning federal deficit became a central topic in the election in a way that hasn’t been in years. Tesla founder Elon Musk and Trump’s one-time political opponent Vivek Ramaswamy have said DOGE will cut wasteful spending to bring balance to the federal budget.

But at the same time, Trump has called for eliminating or extending the country’s debt ceiling. To Thornberg, that shows a lack of desire to truly address the federal debt, which, as of April, has grown $6.17 trillion, or 21.7% since President Joe Biden took office. Trump has also said he wants to extend tax cuts implemented during his first term.

While fears of government overspending have existed for decades, Thornberg said the country has never had 120% debt-to-GDP ratio before. The country has also never had a 7% deficit in a full-employment economy since World War II.

The country’s strong financial market has attracted foreign investment, keeping the dollar strong and the deficit problems out of mind, Thornberg said.

“The bubble will pop, that’s the nature of bubbles,” Thornberg said. “And when it does, foreign interest in our financial markets will go away. That decline in demand to put in the U.S. economy will lead to a depreciating dollar and increasing interest rates. And that’s when things get interesting.”

To cover the cost of federal debt, prices everywhere have to follow, he said. It would take an act of law to really address out-of-control spending, which Thornberg doesn’t think Congress will be able to agree on. While he gives credit to Musk and Ramaswamy for looking at ways to cut government excess, he doesn’t see it practically being done.

“Every congressperson agrees with spending reductions as a general concept,” Thornberg said. “But every time you come to some specific line item, you’re stepping on some congressperson’s pork, and that’s a whole different deal.”