Lessons learned from the economy in 2025

Stephen Stanley | December 19, 2025

This material is a Marketing Communication and does not constitute Independent Investment Research.

This year was dominated by policy swings.  With a new administration taking office, the prevailing wisdom was that tax cuts and deregulation would boost growth. But the focus quickly shifted to tariffs, and Liberation Day brought a massive deterioration in financial markets as many expected dire repercussions.  Though the worst fears in April failed to materialize, for good measure, the federal government shut down in October and early November for six weeks, the longest in history.  In the end, the U.S. economy slowed but seems to have survived all of the turmoil. There are three takeaways from this year that may offer broader lessons for financial market participants.

#1: A resilient economy

In the wake of Liberation Day, there were dire predictions of recession, capital flight from the US and the dollar losing reserve currency status.  As it turns out, none of that happened.  Still, given the unprecedented nature of the tariff threats, the concerns were not outlandish.

The fact that the economy navigated the policy shoals and managed to continue on a reasonably healthy track is a testament to the resilience of the US economy.  The largest economy in the world is incredibly diversified, more flexible than most other major countries, and is fueled by innovative businesses and skilled and industrious workers.  It takes a lot to knock the US economy off its pins, and, in the end, Liberation Day and everything else thrown at it this year was not sufficient to create a meltdown.

That being said, the US economy is certainly not invincible, as demonstrated by the Global Financial Crisis and Covid.  Nonetheless, the ability of businesses and households to pivot and keep doing what they do in the face of a stormy policy landscape was impressive in 2025.

If the drag from policy-related uncertainty wanes heading into 2026, as I expect, a major brake on economic activity should lift, allowing businesses to re-engage on their investment and hiring plans and likely driving an acceleration in real GDP growth for the year.

#2: US companies are incredibly adaptive

In the run-up to Liberation Day, I traced out a reaction function that turned out to be terribly oversimplified.  I figured that the administration would impose tariffs in April, firms would take a month or two to figure things out and then adjust their prices accordingly in the summer, so that, by the fall, the temporary inflation impact of tariffs would be largely behind us.

The transmission from tariffs to consumer prices turned out to be far more complex and nuanced.  For one thing, the implementation of tariffs ended up being a roller coaster, with tariff rates on specific products and for particular countries swinging up and down as the administration’s policy strategy evolved.

More importantly, rather than passively accept their fate, US businesses aggressively sought to minimize the disruption and damage.  Pricing strategy varied widely across industries and sectors, reflecting the different degree of pricing power available across firms and a myriad of other factors.

Many firms reported taking a nuanced approach.  For example, automakers determined to hold the line on pricing during the 2025 model year, absorbing billions of dollars of added costs, and only began to revisit their sticker prices in earnest as the new model year began in the fall.  Others decided to wait out the fluctuating tariff levels because they concluded that raising their prices multiple times could alienate a customer base that has grown weary of high prices after the post-pandemic inflation spike.  Better to hold off until there was a definitive tariff schedule in place and then make one adjustment than to have to make multiple hikes as circumstances changed.

Perhaps the most important strategy that businesses employed in advance of Liberation Day was to stock up on inventories of supplies and finished goods.  Typically, firms might hold two or three months’ worth of inventories, but many executives had the foresight to accumulate far larger stockpiles than usual.  As a result, many companies were able to hold the line on pricing for most of 2025, as they continued to sell inventories that had been procured at pre-tariff prices.

The flip side to this strategy is that it has merely delayed the inevitable.  Numerous businesses have recently indicated that they expect to raise prices in early 2026.  For example, a few weeks ago, the Walmart CFO stated that for his company, tariff-related price hikes would likely peak in the first quarter of next year.  A number of other retailers have similarly indicated that they intend to get through the Christmas season and then look at potential price increases.  As a result, I expect that inflation is likely to remain elevated in the first half of 2026 and could even accelerate somewhat, though the upward pressure on prices from tariff pressures may abate later next year.

#3: Absence makes the heart grow fonder

Economists and financial market participants have spent years poking holes in the methodology and accuracy of the top-tier government-produced data.  Response rates to the payroll survey have declined, the household survey is notoriously erratic, and there are a myriad of questions about the methodology of the CPI.  Still, for all their shortcomings, we learned during the federal government shutdown in October and November how vital these indicators are to the real-time understanding of the economy.

As Chair Powell and other Fed officials noted this fall, there are a number of datasets produced by the private sector that could, in theory, serve as placeholders for the official employment figures.  Economists and financial market participants grasped onto a variety of labor market measures during the shutdown, including some that I had never heard of before this fall.  In the end, most of them turned out to be inaccurate. There were several private sector series, most notably the ADP gauge, that pointed to disturbing weakness in private sector employment during the shutdown months. From September through November, the ADP measure registered a net outright decline in private sector jobs.

As it turns out, we learned when the payroll figures for October and November were released that private sector employment rose substantially, posting an average gain of 75,000 a month from September through November.  I have long been a skeptic of the correlation between ADP and payrolls. My attitude during the shutdown was that if a data series was not worth focusing on before the shutdown, it should be ignored in the absence of government data. Many analysts became unnecessarily worried for doing the opposite. The bottom line is that for all the flaws in the BLS employment report, it is easily the best and most comprehensive information we have on the labor market situation.

As Powell and others also affirmed, there is not much private sector data to replace the CPI.  As a result, financial market participants were largely in the dark about inflation trends this fall. Moreover, the November CPI results appear to have been significantly compromised by the disruptions to the data collection process. The consensus reaction from economists and investors to the shockingly soft November CPI readings was to downplay the results as distorted.  The hope is that the process returns to normal for December and the next CPI release will be more reliable.

Fed officials and economists can always rely on survey and anecdotal evidence to get a rough sense of the economy’s trajectory. However, the disruption of the government shutdown reinforced the fact that there is no adequate substitute for the gold standard government-produced data. The hope as we head into 2026 is that the statistical agencies manage to get back on a normal schedule soon and that we do not see another interruption of the data flow when the current continuing resolution expires at the end of January.