The U.S. real gross domestic product (GDP) growth will slow in 2024 and match the prior year’s growth. Economic growth is forecasted to fall slightly in 2025 and remain flat in 2026 as the economy adjusts to lowering interest rates before returning to trend growth (+2 percent) in 2027.
The Federal Reserve has pulled down the inflation rate and, lacking any unforeseen situation, finally should return inflation to a manageable annual growth rate of slightly above 3 percent. The Fed’s target rate for inflation is 2 percent. There is a clear, direct correlation between inflation and energy costs. Controlling energy costs is a major step in lowering the rate of growth in inflation.
Key assumptions and strengths of the U.S. economy:
- Housing starts currently are above 1.35 million units annually and will continue to aid economic growth through 2029, with starts averaging 1.5 million units. Starts increasingly favor single-family units (70 percent of total starts), which average 50 percent greater floor area over multi-family units. Housing construction is getting a push from builder incentives, baby-boomer downsizing with generally considerable equity to offset higher home prices and interest rates, and investment firms financing single-family homes built for rent.
- Residential home improvements will grow slowly through the first half of 2024 and then accelerate in the second half of 2024, growing at a moderate clip throughout the forecast period as households, unwilling to sell their current low interest financed homes in a desirable neighborhoods, remodel their residences.
- Consumer spending is slowing as many consumers’ finances are being stretched by inflation, rising debt levels, and slowing employment growth.
- Real personal disposable income will grow at an inflation-adjusted annual rate of 2.0 percent or greater through 2028, largely driven by moderate growth in skilled and technical worker employment increases and wage growth. Income growth will endure headwinds resulting from weak employment growth due to automation and a decline in unskilled labor jobs through 2029.
- Non-residential building construction will grow throughout the forecast period, especially for education, transportation facilities, health care, lodgings, and institutional building types. Conversely, office, religious, amusement and recreation, and retail building construction, except for retail warehouses, will decline slightly.
Factors threatening the U.S. economy include:
- High energy prices impact all areas of the economy.
- Inflation will continue to be an issue among key commodities. Inflation saps consumer spending power and reorders the purchasing priorities of affected households.
- Deficit spending will weaken the U.S. dollar by increasing the money stock, raising the federal debt, and put upward pressure on inflation.
- Federal debt will exceed $34 trillion for the U.S. by the end of 2024, and the interest on this debt ($800 billion per annum) will be nearly equal to the U.S. annual defense spending budget for the same year ($849 billion). Federal debt will continue to rise, and payments on this rising debt will absorb more of the federal budget.
- Slowing employment growth will stymie economic growth. In 2023, 25 percent of hiring was by government and 39 percent by quasi-government education and health care sectors, leaving 36 percent of new jobs (=974,000 new jobs for the full year or 81,000 jobs per month) being created in the private sector.
- Other potential threats to the U.S. economy include a widening war in Ukraine or the Middle East, new conflicts in Taiwan, the Persian Gulf, or other areas; a major domestic civil disturbance; another global pandemic; a major trade war threatening prices and logistical trains; or other catastrophe.
The Index of Leading U.S. Economic Indicators are predicting a downturn.
Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.