Election Uncertainty May Hold Off Spending

Given the pivotal nature of this year’s presidential election, many consumers and businesses, faced with uncertainty about the outcome, will hold off on expenditures until the direction of the economy is clearer, which will present a headwind to economic growth in 2024.

The U.S. economy’s solid foundation is eroding. Key economic assumptions of this forecast include:

A recession will not occur; instead, the slowing of the economy that began in 2023 will extend through 2025, with an upturn occurring in 2026. The U.S. then will see moderate growth in 2027 and then slow through 2029.
The Federal Reserve will continue to slow inflation with monetary policy that will keep the prime rate, which was 8 percent in 2023, slowing to 5 percent in 2028. This is above the recent average rate of 3.5 percent. Inflation will not return to the 2.3 percent range until 2026.
Inflation-adjusted Real Consumer Spending will continue to grow slowly (about 2 percent per annum) through the forecast period (consumer spending is 70 percent of the U.S. Gross Domestic Product (GDP)).
Inflation-adjusted Real Disposable Personal Income will grow moderately, buoyed by growth in professional and skilled occupations and slow overall employment growth.
Housing starts will proceed at a moderate pace despite rising interest rates, rising home prices, and affordability issues. Single-family homes will dominate this growth. Multi-family housing starts will slow as the high prime rate stymies investment.
Existing home sales will fall below five million units in 2024 and 2025. It is forecast that they will remain above or near five million units sold annually in 2026 and the remainder of the forecast period.
Commensurate with the slowing economy later this year and into 2025, the Real Non-Residential Investment in Buildings will be weak through 2029 with a mixed performance by building type.
Business profits and investments will be strong in 2024 as prior year projects finish out, weaken in 2025 and 2026 as business profits erode, and then return to normal growth in 2027 through 2029.
Non-residential building rehabilitation will begin to see growth in 2024 as corporate profits revive and as firms evaluate what their true requirements will be for space, workers, and enhanced productivity. This situation will vary by building type.
Non-residential building construction will find similar market dynamics as non-residential building rehabilitation: education/institutional, health care, and retail will out-perform; offices will under-perform; and lodgings will have its normal mixed performance.
No state or the federal government will reinstate mitigation policies, slowing or thwarting economic growth.
The U.S.-China trade war and the subsequent tariffs on Chinese imports to the U.S. (plus U.S. exports to China) are forecasted to continue at least through 2024 and likely throughout the forecast period.
More foreign firms will establish flooring manufacturing operations in the U.S., given domestic production and inventory advantages, tariff avoidance, an expected weak U.S. dollar, and rising labor costs abroad.

Given the pivotal nature of this year’s presidential election, many consumers and businesses, faced with uncertainty about the outcome, will hold off on expenditures until the direction of the economy is clearer.

There are many downside risks related to this forecast:

Although no new taxes that could directly stymie consumer spending are expected, federal regulations have and likely will continue to slow economic growth, especially in the energy and related sectors.
Continued deficit spending and high energy prices will stoke inflation, hampering economic growth.
Consumers are drawing down savings, and credit card debt is at record-high levels.
The U.S. stock market is expected to remain relatively positive. Should a major market correction occur, it would jeopardize the economy, especially firms and individuals with retirement savings, endowments, pensions, etc.
Sanctions on imports or materials derived from the Uyghur camps located in China have caused logistical disruptions of some Chinese imports. However, it is not expected that an expansion of this rule will occur, causing major supply chain issues.
It is not expected that the war in Ukraine, the Middle East, or any other global war or terrorist threat, will occur that threatens the U.S. economic growth.
There are not expected to be any significant logistical interruptions during the course of this forecast.

The U.S. economy withstood COVID-19 mitigation policies and snapped back in a matter of months. Further, funds provided by federal programs boosted consumer spending while also contributing to the high rate of inflation. However, because inflation is diminishing some consumers’ buying power, they are now drawing down savings, and credit card debt is at record levels. Employment growth slows due to automation and technological advances, and inflation hiders (Figs. 1.1 and 1.2).

Despite recent prior-year solid gains, productivity decreased in 2022, and inflation, as measured by the Consumer Price Index, rose significantly at the same time and will not return to traditional levels of about 2 percent until 2025. Like energy costs, productivity is a major hedge against inflation, as more productive workers keep labor costs at bay.

Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.