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This is the thirty-fifth in a series of informative monthly articles for North Carolina businesses from PNC in collaboration with BUSINESS NORTH CAROLINA magazine.
By Gus Faucher, Chief Economist, The PNC Financial Services Group
Key indicators point to strong economic health, yet uncertainty remains
As we reflect on a year that saw the U.S. economy achieve continued low unemployment but slower inflation, a feat many thought impossible, several drivers point to continued economic strength in 2025.
Buoyed by solid fundamentals, a strong labor market, favorable conditions for consumers, lower interest rates and slowing inflation, the U.S. economy should continue to experience growth in 2025, albeit at a more modest rate than we saw in 2024.
The excellent labor market is the biggest reason for optimism around the economy. And while the unemployment rate, at 4.2% in November 2024, is up from 3.4% at its lowest in 2023, it remains remarkably low. Job growth through the first 11 months of 2024 averaged 180,000 jobs per month, down from 232,000 in 2023 – but still almost double the pace sustained during the 2010s. With businesses reporting hiring difficulties, layoffs at historic lows and initial claims for unemployment insurance down from mid-2024, the job market should remain strong throughout 2025.
This exceedingly strong labor market bodes well for consumer spending and household purchases in 2025. More jobs and rising wages translate to higher incomes. And if these attributes continue to hold, the broader economy should expand throughout 2025, especially since consumer spending makes up about two-thirds of the U.S. economy.
Prices increased at the fastest pace in decades in 2022, but inflation is now slowing and putting less pressure on household budgets, much to the relief of consumers and businesses alike. Goods prices are
down over the past year as lingering supply chain problems have resolved. Meanwhile, housing inflation is easing as rent growth has lessened. This lower inflation has given the Federal Open Market Committee the leeway to cut the federal funds rate, their key short-term policy interest rate, starting in September 2024. Further rate cuts in 2025 can be expected to support growth, particularly in rate-sensitive sectors like business investment and housing.
Another positive for 2025 is continued strength in business investment. Against the backdrop of a tight labor market, firms are investing in equipment, workplaces and technologies to make their existing workforces more productive. These investments are enabled by good corporate profitability and falling interest rates. And in the housing market, an undersupply of housing for the last 15 years, along with lower mortgage rates, should support residential construction.
Among the negatives for 2025 are softer growth in consumer and federal government spending. After a few years of substantial increases in government spending thanks to the bipartisan Infrastructure Investment and Jobs Act, the Inflation Reduction Act of 2022 and the CHIPS and Science Act, the government’s contributions to economic growth should abate.
As is the case in any year – and particularly during a transition in administration – a force as dynamic as the economy brings with it elements of uncertainty.
Typically, administration changes add some uncertainty to economic outlooks, but there are reasons for optimism, including potential tax cuts and reduced regulations that could lead to stronger economic growth.
However, tariffs, which are taxes on imported goods, would be a drag on consumer spending and cause higher prices. Higher U.S. tariffs could lead trading partners to put their own restrictions on U.S. imports, leading to a potential trade war and slower global and U.S. economic growth.
Additionally, tariffs and tax cuts could lead to higher inflation, complicating the outlook for the Federal Reserve. Fewer fed funds rate cuts, or even more so rate increases, would likely mean a further slowing in economic growth.
Over the longer run, increased restrictions on immigration would also be a hit to the U.S. economy. One way an economy expands is through more workers, and with the U.S. birth rate falling for decades, foreign-born workers have been a key source of labor force growth. As such, fewer immigrants entering the labor force would mean slower long-run economic growth.
Overall, PNC expects real GDP growth of 1.9% in 2025, down from 2.4% in 2024 and 3.2% in 2023. We expect the unemployment rate will end 2025 at around its current level of 4.2%, and the labor market will remain solid. Inflation should continue to slow, although it will likely not be back to the Federal Reserve’s 2% objective until 2026.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. PNC urges its customers to do independent research and to consult with financial and legal professionals before making any financial decisions.
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