Changes to Fall 2024 Macro Forecasts and Looking Ahead to 2025

We recently revised our US Real GDP forecast upward, and it is important to know where the increase is coming from so you can better determine its impact on your business.

One key factor we need to point out is that the data used in the prior forecast, done with December 2023 data, was revised upward by 1.3% from the source. This accounts for the majority of the 2.2% favorable deviation in the June 2024 actual compared to our forecast.

As we look forward to 2025, our macroeconomic outlook is for 2.5% growth in Real GDP next year. This is a one percentage point increase from the prior forecast.

One factor behind the upgrade is the likelihood that the services component of GDP will grow in excess of 2% in 2025. However, it is important to be extremely clear: This does not mean services will grow at an accelerating rate in 2025, just that the rate of growth is above 2%. In reality, the services sector will probably grow at a milder pace in 2025 than in 2024, given the softening in job openings relative to unemployment and weakness in the non-manufacturing PMI, among other factors.

Growth in excess of 2% will be fueled by the following:

1. Rising real personal incomes amid a generally tight labor market
2. A boost from a recovering inflation-adjusted money supply
3. Spending from higher-income households who have fared relatively better in this business cycle amid elevated home prices, stock valuations, and corporate profitability

This higher-income households effect is evident in a recent Federal Reserve study that found that high-income households (defined as $100k+) saw inflation-adjusted retail spending increase 16.7% from January 2018 to August 2024. This increase was 13.3% for middle-income households ($60k–100k) and only 7.9% for low-income households ($0k–60k). While this study is specific to retail spending, the effect is probably even more pronounced on the services side of the economy.

Another factor is that the goods side of the economy is rebalancing inventories and some deflationary pressures (in August 2.9% deflation for durable goods and 0.7% deflation for nondurable goods) helping drive volumes higher; however, the deflation may mute the ascent of dollar-denominated Retail Sales. US Goods Personal Consumption Expenditures, adjusted for inflation, accelerated through August 2024. Meanwhile, the US Durable Goods Wholesale Sales/Inventory Ratio is recovering, indicating that the worst of the durable goods inventory glut is behind us. The US Nondurable Goods Wholesale Sales/Inventory Ratio 12MMA is just below a nine-year high, indicating lean inventories within the nondurables space. Much like services, we expect something far from breakneck rise in retail goods, as our ITR Retail Sales Leading Indicator™ has edged lower in recent months after generally rising from June 2023 to June 2024.

Both political parties indicate that government spending is likely to remain elevated, with tax breaks likely. Dollars from previously passed legislation such as the CHIPS and Science Act and the Infrastructure Investment and Jobs Act will continue to flow into the economy as well.

Note that the drivers of our upgraded 2025 growth rate expectation for US Real GDP do not extend to the industrial sector. While we recently upgraded our 2024 expectations for US Industrial Production from very mild decline to essentially flat, we cut our 2025 growth rate expectation for US Industrial Production by a nearly corresponding amount, from +2.2% to +1.4%. Factors behind the downgraded 2025 growth rate include no “rebound” effect given no decline in 2024 industrial activity, milder than normal ascent in our ITR Leading Indicator™ designed specifically to lead industrial activity, and recent weakening in corporate cash, among others.

In conclusion, firms should not take our slightly upgraded 2025 growth rate expectation for US Real GDP or our slightly downgraded 2025 growth rate expectation for US Industrial Production at face value without considering their market(s) first and foremost. Our economists will help you untangle the likely net effect. Our overall advice – know your industry – remains unchanged. This advice is especially pertinent for 2025, when we are likely to continue to see significant differences in growth rates between industries even within the same core segment of the economy.