The U.S. economy generally is performing well, with gross domestic product (GDP) growth in Q3/2024 at 2.8 percent over the same period in 2023. Consumer spending and real disposable personal income both are growing at acceptable levels. But looking past these figures, we find a more ominous situation.
Much of the spending and income growth is occurring among upper-income, skilled households. Inflation is not a factor for approximately a third of the population these households represent, and they are little impeded by rising prices and high interest rates. The rest of the households are being squeezed by rising costs for necessities, forced to endure personal budget constraints, and to prioritize spending.
A huge uncertainty regarding the U.S. economy is to what extent and impact the Trump policies will have. This forecast is based on the assumption that the Trump Administration will be more aggressive and business-oriented in their approach. However, the degree and scope of the actual policies to be implemented remain a mystery in their details.
Concerns regarding the current state of the U.S. economy:
- Inflation growth has slowed due to Federal Reserve rate hikes, declining energy prices, and supply chain improvements. Even so, commodity prices currently are 26 percent above their levels in 2019, and these costs are draining consumers’ purchasing power. The overall inflation rate, as measured by the Consumer Price Index, was 4.1 percent in 2023 and should average 2.9 percent in 2024, falling to 2.3 percent in 2025. Prices almost never fall (that would be deflation, a generally onerous state of economic affairs), the rate of growth merely slows. Therefore, past price increases are very much a part of all current commodity prices.
- Federal spending in fiscal 2024 will be $6.9 trillion. Since 2019, $12.5 trillion has been added to the outstanding federal debt, which now stands at $35 trillion. Total nominal GDP in 2023, representing the value of all the goods and services produced in the U.S. that year, was $27.7 trillion. The outstanding deficit now represents 126 percent of U.S. GDP in 2023.
- Given that interest rates are linked closely to inflation, the U.S. bank prime rate remains elevated and only falling slowly. It is expected that the prime rate will fall to 7.08 percent in 2025.
- To the extent that tariffs are used successfully as a tool to open markets to U.S. exports and incentivize on-shoring of production plants, the U.S. should see a rise in manufacturing jobs and a rise in the middle-class. On the downside, it will cause import prices to rise on nations covered by tariffs, contributing to inflation.
U.S. real GDP growth will match growth closely in the prior year. 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 scope of the stated policies of the Trump Administration could have a major impact, either positive or negative, on the U.S. economy.
The Federal Reserve has pulled down the rate of inflation 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.
Key assumptions and issues affecting 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 in the second half of 2025, growing at a moderate clip throughout the forecast period as households unwilling to sell their current low-interest financed homes in 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 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.
- Election results have Republicans controlling the House, the Senate, and the White House, and they are planning to enact sweeping changes to the government. Trump’s plans include the creation of a new Department of Government Efficiency (DOGE), which will be responsible for streamlining the government, eliminating regulations, and saving $2 trillion in federal government costs.
Factors threatening the U.S. economy:
- Inflation will continue to be an issue among key commodities for many families. 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 continue to rise, and payments on this rising debt will absorb more of the federal budget if action to reverse this trend is not undertaken.
- 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 new jobs.
- 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.
Santo Torcivia is president of Market Insights LLC in Reading, Pennsylvania. He can be reached at 610.927.2299 or storcivia@marketinsightsllc.com.