The prevailing story about the economy is shifting—and investors should pay close attention to the factors driving this change. For much of the past two years, the main focus has been on whether the Federal Reserve could manage a “soft landing”—curbing inflation without triggering a recession. However, recent economic data suggests that this narrow narrative no longer captures the full picture.

What has become apparent is that strong U.S. growth and moderating inflation are not solely products of the Fed’s rate policies. Instead, supply-side forces—including gains in productivity and a larger available workforce—have played a much bigger role than previously acknowledged. These factors have increased the economy’s ability to grow without overheating, allowing for robust GDP gains alongside easing inflation. This means that the positive results seen in 2024 and into 2025 can be attributed as much to underlying economic resilience as to central bank maneuvering.

Looking ahead, policy risks are coming into sharper focus. Potential headwinds such as new trade tariffs and stricter immigration rules could limit these supply-side benefits in the coming months. As a result, economic growth is expected to cool from the roughly 3% pace seen recently to around 2% or slightly lower in 2025. Inflation is likely to continue declining but may not reach the Fed’s 2% target immediately, as some price pressures linger.

Outside the U.S., other major economies have not enjoyed the same combination of strong growth and disinflation, largely due to less favorable supply-side conditions. While the current environment remains highly uncertain, the dominant narrative has shifted: rather than focusing on the Fed’s policy moves alone, investors and policymakers should pay equal attention to the fundamental trends shaping potential growth, productivity, and labor supply. This broader perspective will be crucial for navigating the complexities of the year ahead.