2025/1/1711:19USEconomicForecastQ42024|DeloitteInsights

Deloitte.

Insights

UnitedStates

EconomicForecast

TheUSeconomyremainsstrongwithrobustconsumerspendingandhighbusinessinvestment,butitsfuturetrajectorylargelyhingesonthepoliciesoftheincomingadministration

ARTICLE·18-·13·Deloitte

MINDECEMBERGlobal

READ2024Economics

Research

Center

TheUSeconomyhashadthestrongestrecoveryfromtheCOVID-19pandemicofanymajordevelopedeconomy.AnnualinflationisapproachingtheFederal

Reserve'stargetwithoutarecession,non-managerialrealwageshaveexceededpre-pandemictrends,consumerspendingiscontinuingtoexceedexpectations,

investmentinfactoriesisatrecordlevels,andtheUnitedStatesisanetexporterofpetroleumproducts.

Againstthisbackdrop,inJanuaryanewadministrationwilltakechargeof

government.Initialmarketresponsetothenewswasfavorable,2withthe

expectationthatthenewadministrationwillbeabletobuildontheeconomy's

strongfoundationsandunlockfurthergrowth.Atthesametime,thereremains

uncertaintyaroundthepotentialimplicationsofeconomicpoliciesoftheincomingadministration.

Duringthecampaign,thepresident-electproposedarangeofeconomicpolicy

changes3Ourbaselinescenarioanticipatesthatmanyofthesepolicieswillnotbeimplementedintheirmostmaximalistforms.Forinstance,whileweexpectthe

introductionofsomenewtariffs,wedonotforeseetheimplementationofthe

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across-the-boardtariffsthatwereoccasionallyfloatedduringthecampaign.

Similarly,whileweexpecttheremaybeanincreaseindeportationsof

undocumentedimmigrants,legalimmigrationlevelscouldremainrelatively

unaffected.

However,thisforecastisamongthemostuncertaininrecenttimes,soweinclude

twoalternatescenariostocaptureafullrangeofpossibleoutcomesforthecomingyears.Ourupsidescenarioreflectsmarkets'positivereactionstotheelection,and

includestaxcuts,increasedinvestmentandproductivity,andaminimumof

harmfultariffs.Ourdownsidescenario,ontheotherhand,includesawiderangeoftariffs,significantdeportations,andsweepingcutstogovernmentspending.

Scenarios

Baseline(50%):Inourbaselinescenario,weexpectthenewadministrationtobe

judiciousinhowtheyimplementtheircampaignpromises.Weforeseenewtariffs

onChinaandsometargetedtariffsonothertradingpartners,butnoneonCanadaorMexico,andmanycategoriesofgoods—suchasfoodandenergyproducts—willbespared.Similarly,whileweexpectdeportationstorunabovetheircurrentlevels,thisscenariodoesnotforeseemillionsofdeportationsasthiswouldcausefood

pricestorisegiventhatnearlyhalfoftheagriculturalworkforceismadeupof

undocumentedimmigrants;"voterangerwithhighfoodpriceswasasignificant

factorintheelectionoutcome,andthenewadministrationisexpectedtobe

sensitivetothat.Significantgovernmentspendingcutsareenacted,buttheseare

notenoughtochangetheoveralleconomicpicture.Therearealsosomeeasywins:

TaxcutsundertheTaxCutsandJobsAct(TCJA)areextended,andtheFed

remainsindependent.

Inthisscenario,individualsandbusinessesfront-loadsometradeactivityin2025toavoidtariffs,withexportsgrowingby3.2%andimportsgrowingby4.4%.

Oncetariffstakefulleffectin2026,bothexportsandimportsgrowbyjust0.7%.

Theinflationaryeffectsoftariffsmeaninflationrisesagain,andtheFedisforcedtopauseratecutsuntilmid-2027.Consumerspendinggrowsby3.1%in2025and

2.3%in2026;overallconsumerspendinggrowthremainslowthroughoutthe

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remainderoftheforecasthorizon,averaging1.8%peryearasdeportationsholdbackpopulationgrowth.Governmentspendingcutsarefullyimplementedinthe2026fiscalyearandfurthersubtractfromgrowth.Overall,ourmodelingshowsrealGDPgrowthof2.4%in2025beforeslowingto1.7%in2026.GDPgrowththenrangesfrom1.9%to2.1%between2027and2029.

Taxcuts,tradedealsandderegulation(30%):Marketsreactedpositivelytothe

electionresults.Investorsclearlybelievethenewadministrationcanunlockanewlevelofgrowththroughtaxcutsandderegulation.Inthisscenario,weexamine

whatmighthappenifthesehopescometrue.TheTCJAtaxcutsareextended,andthecorporatetaxrateisloweredto15%fordomesticproducersasperacampaignpromise,'promptingaboostininvestment.Thatadditionalinvestment,aswellasthesuccessfulintroductionofnoveltechnologieslikeAItoworkplaces,resultsinaproductivityboom.Weseethisscenarioasaboutequallyaslikelyasthebaseline.

Weincludeminimalnewtariffsinthisscenario,workingonthetheorythatthe

president-electwillusethethreatoftariffstosuccessfullystrikenewtradedealsonfavorableterms.Inaddition,businessesconvincetheadministrationtolimit

deportationsinthenameofkeepingpriceslow.

Inthisscenario,GDPwillrisemorerapidlythanthebaselineforecastthroughto2029.Between2025and2029,thisscenarioexpectsGDPtoriseatanaverage

annualrateof2.7%,whichis0.7percentagepointsabovetheaverageinthe

baselineforecast.Withfewertariffsinplace,thisscenarioalsopredictslower

inflationcomparedtothebaseline,strongerconsumerspendingstartingin2026,andalowermerchandisetradedeficit.However,duetotheinflationaryimpactofthetaxcuts,inflationdoessettlearound2.3%peryearbytheouteryearsofthe

forecast,higherthaninthestatusquoante.Finally,withfewerdeportations,labormarketswillnotbeasgreatlyimpactedasinthebaseline.Thelaborsupplywill

riseabovethelevelsinthebaselinescenario,andconsequently,sowillemployment,limitingthegainsintheunemploymentrate.

Acceleratinginflationandshrinkingpopulation(20%):Whileourbaselineexpectssomepolicychangesfromtheincomingadministration,itreflectsarelatively

minimalistversionofwhatwaspromisedonthecampaigntrail.Thereisa

possibilitythatsomeofthemoreimpactfulpolicyproposalscouldbeimplemented

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infull,andwethereforemodelanalternatescenariowheremanypromisesareimplementedmorefully.

Thefullrangeofpromisedtariffs(60%onallgoodsfromChina,20%ongoodsfromallothertradingpartners°)areintroduced,resultinginamajorreductioninbothexportsandimportsandabroadereconomicslowdown.Deportationsreach1millionpeopleperyearandlegalimmigrationlevelsarecutinhalf,withthe

resultthattheUSpopulationislowerin2029thanitistoday.AtotalofUS$1.35trillioniscutfromfederalgovernmentspending,achievedthroughdeepcutsto

Medicaidtransfers,socialsecuritypayments,andincomesecurityprograms,representingabigdecreaseinthelivingstandardsofmillionsofAmericans.

Overall,economicgrowthslowsconsiderablyto1.6%in2025beforetheeconomysuffersanoutrightcontractionof2.1%in2026,arecessionofsimilarmagnitude

tothoseweexperiencedin2020and2009.Theeconomyisexpectedtorunweakerforlongerasrisingtradetensionsandthesustainedenforcementofthenew

immigrationpolicykeepconsumptiongrowthintheredformostoftheforecast.Inflationalsotrendshigherforlonger,peakingat3.7%in2026beforeeasing

graduallyto3%bytheendoftheforecast.Withtheseinflationarypressures,weexpecttheFedtoenteranewratehikingcyclein2026beforeagainbeginningtoeasemonetarypolicyin2027.

Tosomeextent,theweakereconomyinthisscenarioisnotsurprising:Thestated

purposeoftariffsistore-shoremanufacturingtotheUnitedStates,butthatprocesswilltaketime,soanybenefitsofsuchapolicywillnotbefeltduringthenextfouryears.Thepolicyofmassdeportationswouldlikelyhaveaprofoundeffecton

industrieslikeagricultureandhospitality,whereundocumentedworkersmakeupasignificantshareofthetotalworkforce.Likewise,makingdeepcutstogovernmentspendingandtransferswillalwaysbeanetnegativetothemacroeconomyinthe

shortterm.

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Figure1

RealGDPgrowth

—Baseline—Taxcuts,tradedeals,andderegulation……Acceleratinginflationandshrinkingpopulation

USStrillions

27

HistoryForecast

26

25

24

23

22

21

20

2018201920202021202220232024f20252026202720282029

Note:fdenotesforecast

Source:Deloitteanalysis.

pelgite.|/

Sectors

Consumerspending

Realconsumerspendingremainsstrong.InSeptember,realpersonalconsumptionexpenditures(PCE)increased0.4%aftera0.2%riseinAugust.Forthethird

quarterof2024,overallrealPCErose3.7%(atannualrates),strongerthanthe

2.8%growthrecordedinthesecondquarter,withspendingongoods,specificallydurablegoods,remainingelevated.Realconsumerspendingondurablegoodsgrew

8.1%inthethirdquarterafterrisingmorethan5%inthesecondquarterofthisyear.Generally,increasedspendingondurablesisseenasasignalofrising

consumerconfidence.

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Householdsdepletedtheirpandemic-eraexcesssavingsinMarchofthisyear,andthusgainsinconsumerspendingintheshorttermareexpectedtobedrivenby

growingincomeandtheabilityofhouseholdstoaddnewdebt.Householddebt

continuedtorise,increasingbyUS$147billioninthethirdquarterof2024,whichincreasedconsumer'sspendingcapacity.

Inthecomingquarters,theFed'sexpectedratecutswillmakeborrowingcheaper,enablinghouseholdstotakeonmoredebt,andthereforeprovidingbreathingroomforhouseholdstocontinuespendinguntil2025.Wealsoexpectconsumerswillbedoingsomefront-loadinginlate2024and2025totrytogetaheadoftariffs,

whichweseecomingintofullforcein2026.Startingthatyear,thetariffswill

impacthouseholds'realpurchasingpower.Consumerspendingwillalsobe

negativelyaffectedbythebroadereconomicslowdowncausedbythetariffsand

governmentspendingcuts.Additionally,ourforecastsareforaggregateconsumerspending,andasdeportationscontinue,thenumberofpeoplespendingmoneyintheeconomywillbelowerthaninthestatusquo.Nonetheless,theunderlying

strengthoftheconsumermeanswedonotseeanyoutrightdeclinesinspending.

Overall,weforecastconsumerspendingwillrise2.8%thisyearandanother2.4%in2025beforegrowingataslower1.7%pacein2026.Lowerinterestratesshouldhelpboostdemandfordurablegoods,boostingspendingonthatcategoryby4.7%in2025beforetariffsbringgrowthtojust1.9%in2026.Spendingonnon-

durablesisexpectedtoriseby2.5%in2025and0.8%in2026.Finally,spendingonservicesisexpectedtoincreaseby2.9%in2025andbyasimilaramountin

2026,giventhatserviceswillnotbeimpactedbytariffs.

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Figure2

Consumerspendinggrowth

—Durables…Nondurables—Services

Percentagechange

2018201920202021202220232024f20252026202720282029

Note:fdenotesforecast.

Source:Deloitteanalysis.

ie./

Figure3

Consumerspendinggrowth

%yearoveryearunlessmentionedotherwise

History

Forecast

2018

2019

2020

2021

2022

2023

2024f

2025

2026

2027

2028

2029

Realconsumerspending

2.7

2.1

-2.5

8.8

3.0

25

2.7

3.1

2.3

2.2

1.6

1.6

Durablegoods

6.6

3.3

71

16.6

-1.9

3.9

2.9

4.7

1.9

12

17

1.2

Nondurablegoods

2.6

3.0

34

8.6

0.1

0.8

1.9

25

0.8

0.9

0.9

0.9

Services

2.2

1.7

-5.8

75

5.0

2.9

2.9

2.9

2.8

2.7

1.8

1.9

Nethouseholdwealth(USStrillions)

105

117

132

151

144

155

171

171

166

171

177

183

Unemploymentrate(percentage)

3.9

3.7

8.1

5.3

3.6

3.6

4.0

4.3

4.3

4.2

4.1

4.0

Consumerpriceindex

24

1.8

1.2

4.7

8.0

4.1

2.9

2.5

2.6

24

2.6

2.4

Note:fdenotesforecast.

Source:Deloitteanalysis.

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Housing

Homebuildinghasbeenmoreheavilyimpactedbyhighinterestratesthanothercategoriesofinvestment.InOctober,bothhousingstartsandbuildingpermitsfellforthesecondmonthinarow,aselevatedratescontinuetoweighonaffordabilityforbuyersandontheabilityofbuilderstoborrow.Duringthe2010s,housing

startsdidnotreturntotheirpeaklevelsfrombeforetheglobalfinancialcrisisof2008-2009.Thelong-termfailuretobuildenoughhomeshascontributedtothehousingcrisisweseetodayinsomepartsofthecountry,andwemayhavetowaitforratestodroptoseeasignificantuptickinhousingconstruction.One

opportunityforthenewadministrationcouldbetopursuesomethingliketheCreatingHelpfulIncentivestoProduceSemiconductors(CHIPS)Act,butforbuildinghousing.

Weexpecthousingstartstocontinuefallinginthelastquarterofthisyearbefore

risingagainin2025to1.4millionasinterestratesfall,encouragingmore

construction.Wealsoanticipatehousingstartstoincreaseabove1.5millionin

2026andremainaround1.5millionfortherestoftheforecast.In2025and2026,thehousingstockisexpectedtorisemorerapidlythantotalpopulation,helpedinpartbytheslowerpopulationgrowth.

Despiteastronglevelofconstructioninthemediumterm,fortheretobearealimpactonaffordability,moreofthisnewconstructionwillneedtobe"starterhomes"andwillneedtobebuiltinpartsofthecountryexperiencingthelargestincreasesinpopulation.Weexpectthistocontinuetobeachallenge.

Consequently,thehousepriceindexisforecastedtoriseby4.8%in2024,withgrowthexpectedtoslowto2.9%in2025.Intheouteryearoftheforecast,thehousepriceindexisexpectedtorisemorerapidlyonceagain.

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Figure4

Housing

—Housingstarts(LHS)

Thousands

2,200History

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

20182019

……Realinvestmentinprivatehousing(RHS)

Forecast

20202021202220232024f2025

Percentagechange1510 5 0-5-10-15-20

-25

2026202720282029

Note:fdenotesforecast

Source:Deloitteanalysis.

Deloitte.

Insights/

Figure5

Housing

%yearoveryearunlessmentionedotherwise

History

Forecast

2018

2019

2020

2021

2022

2023

2024f

2025

2026

2027

2028

2029

Realinvestmentinprivatehousing

-0.7

-0.9

77

10.9

-8.6

-8.3

3.9

07

1.4

18

1.9

18

Housingstarts(thousands)

1,205

1,247

1,292

1,394

1,605

1,552

1,421

1356

1,438

1,466

1444

1,441

Stockofowner-occupiedhomes(millions)

138

140

141

142

144

145

147

148

150

151

152

154

Interestrateon30-yearfixedratemortgages(percentage)

4.54

3.94

3.1

2.96

5.33

6.80

6.69

6.37

6.69

6.39

5.84

5.85

Note:fdenotesforecast.

Source:Deloitteanalysis.

/

Deloitte.

Insights

Businessinvestment

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Investmentisspendingthathelpsgrowthelong-termproductivecapacityofthe

economy,andassuch,isthemostimportantsectorforunderstandingan

economy'spotential.Investmentinstructures,whichincludesbothbuildingsand

engineeringstructuressuchaspowerplantsandoilplatforms,hastypically

followedacyclicalpattern,andisoftendrivenbycommoditypriceboomsand

economiccycles.However,themainfactordrivinggrowthinthisinvestmentclasssincethepandemic,especiallyinmanufacturingconstructioninvestment,hasbeenthepassageoftheInflationReductionActandtheCHIPSandScienceAct.These

piecesoflegislationaimedtoincreaseUSproductionofstrategictechnologieslike

electricvehicles,batteries,renewableenergy,andsemiconductors.Sincethe

passageofthesepiecesoflegislationinAugustof2022,spendingonmanufacturingconstructionhasrisentohistorichighs,withinvestmentinstructuresincreasing

10.8%in2023.AlthoughHouseSpeakerMikeJohnsonhasfloatedthepossibilityofrepealingthesepiecesoflegislation,wedonotexpectthattohappen.Both

piecesoflegislationarepopular,andtheirbenefitsareskewedtowardRepublicandistricts,makingitunlikelytheywillbeabletogetenoughvotesforarepealwiththeirslimmajorityintheHouse.

Asfactoryconstructionincreases,sodomachineryandequipment(M&E)

investmentandintellectualproperty(IP)investment,whichcaptureeverything

fromplantmachineryandcomputerstosoftware.M&EandIPinvestments

increasedsignificantlysincethestartof2024.WepredicttheriseinmanufacturingconstructionactivitytocontinuetoincreaseinvestmentsinM&EandIP.Overall,ourforecastshowsM&Einvestmentsrising5.1%in2025and5.4%in2026.Thistypeofspendinghasseenastrongupwardtrendovertime,andweexpectthat

strongtrendgrowthtoremainthroughouttherestoftheforecastperiod.BusinessinvestmentsinIP,whichincludenotonlysoftwarepurchasesbutalsoresearchanddevelopmentspending,increasedsignificantlyduringthepandemicasfirms

adaptedtonewwork-from-homerealities.GrowthinIPinvestmentisexpectedtoslowcomparedtothegainsobservedin2021and2022butwillremainhighoverthecourseoftheforecastperiodasmanysectorsincorporateartificialintelligenceandothertechnologies.

Whilehigherinterestratesareusedtocombatinflationbyreducingdemand,theycanparadoxicallycauseinflationarypressurestopersistforlongerbymakingit

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moreexpensiveforfirmstoinvestinthecapacitytoproducemoreandrelieve

supplypressures.Theaveragecorporateborrowingrateincreasedtonearly7%bytheendof2023andremainedelevatedthroughthefirstthreequartersof2024,

presentingabarriertofirmswhoneedtoborrowtoinvest.However,manyfirmsstillhavemorecashonhandthantheydidbeforethepandemic"andcan

consequentlyavoidborrowingattheserates.Asaresult,businessinvestmenthasbeencominginrelativelystrongsincethestartoftheyear.FurtherratecutsfromtheFedshouldhelpcontributetoapositiveenvironmentforbusinessinvestment.

Thisshouldbefeltinparticularlyrate-sensitivecategoriesofinvestmentlike

housingandcommercialrealestate,bothofwhichhavebeenweakduringthe

currenthigh-interestrateenvironment.

Lookingahead,marketsseemtoexpecttheincomingadministrationwillfurtherboosttheattractivenessofbusinessinvestment.Allourscenariosforeseethe

extensionofthetaxcutsputinplacethroughtheTCJA,whichweresettoexpirein2025,aswellastheloweringofthecorporatetaxrateandcutstosome

regulations.Asaresultofallthesefactors,non-residentialbusinessinvestmentisprojectedtoincrease3.9%thisyear,3.7%in2025,andanother4.7%in2026.

Growthinbusinessinvestmentisexpectedtoriseevenfurtherin2027andremainelevatedintheouteryearsoftheforecast.

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Figure6

Figure7

Businesssector

%yearoveryearunlessmentionedotherwise

History

Forecast

2018

2019

2020

2021

2022

2023

2024f

2025

2026

2027

2028

2029

Realfixedbusinessnvestment

6.9

3.8

-4.6

6.0

7.0

6.0

3.9

3.7

4.7

5.9

33

3.2

Realinventory

accumulation

(2017USSbillion)

54

72

-30

12

119

33

61

83

8

-6

7

19

Employmentcostindex

2.8

2.7

2.6

3.3

4.9

4.5

4.0

3.4

3.0

3.2

3.1

31

Corporateprofitsbeforetax

6.3

4.5

-2.4

276

78

6.9

83

5.3

3.2

31

5.4

-0.2

Yieldon10-yeartreasurynote(percentage)

2.91

2.14

0.89

144

2.95

3.96

4.23

4.30

4.29

4.09

3.85

3.88

Note:fdenotesforecast.

Source:Deloitteanalysis.

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Foreigntrade

Foreigntradeisthesectorwiththebiggestquestionmarksurroundingit.The

president-electhaspromisedtointroduce60%tariffsongoodsimportedfrom

Chinaanda10%to20%tariffongoodsimportedfromallothertradingpartners.Atpresent,14%ofgoodsimportscomefromChinaandatotalof38%ofall

goodsimportscomefromcountrieswithoutatradeagreement.Iftheproposed

tariffsareonlyimposedonthisgroupoftradingpartners,theaveragetariffrateonimportedgoodswouldreach11.8%.Thereissomedebateaboutwhetherthe

WhiteHousecanimposethesetariffsunilaterally,butattheveryleasttheywillnotimmediatelybeabletodosoongoodsimportedfromcountrieswithwhichthe

UnitesStateshasafreetradeagreement.Weexpectthiswillprovideanopportunityforcountriestonegotiatedealstoavoidtariffs.

Additionally,therearegoodpoliticalreasonstoexpectbroadcategoriesofcriticalgoods,suchasfoodorenergy,tobeexemptedfromtariffsaltogether.Withthisinmind,ourbaselinescenariomodelstheimpactofanaveragetariffof30%on

Chinesegoodsandanaveragetariffof5%ongoodsimportedfromcountriesthatarenotpartoftheUnitedStates-Mexico-CanadaAgreement.

Althoughthetariffsinourbaselinescenarioarelessambitiousthanthenumbers

floatedonthecampaigntrail,theirtotaleffectisexpectedtobemuchgreaterthanwhatwesawduringthepresident-elect'sfirstterm.Theimpositionofthesetariffsislikelytoturnintoacomplicatedprocessinvolvingindividualsandbusinessestryingtomakesubstitutiondecisionsbasedonnewrelativeprices.Untilthetariffstake

effect,weshouldcontinuetoseegrowthinbothimportsandexports.Weexpectthiswilltranslateina3.1%increaseinexportsanda4.4%increaseinimportsin2025.Oncethetariffsareofficiallyputinplace,weforecastbothexportsand

importstogrowmuchmoreslowly:0.7%eachin2026.

Itmaybeabitsurprisingtoseethatexportssufferasmuchasimportsbythe

impositionoftariffs.Thereareafewreasonswhythisisthecaseintheshortterm,andwhythesetariffsmaynothavetheirdesiredimpactinthelongrun.First,

abouthalfofimportsarecurrentlyusedasintermediateinputsbyUSbusinesses.ItislikelytotakesometimeforUSproducerstofindlocalalternativestothegoodstheyarecurrentlyimporting,andinthemeantime,theircostofdoingbusinesswill

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rise.ThisdynamicwillreducethemoneyavailabletofirmstoinvestandmaydrivesomeUSproducersoutofbusiness;itwillalsomaketheirexportscostlierandlesscompetitive.Second,whentheUnitedStatesimposestariffsonothercountries'

goods,ithasthesideeffectofcausingtheUSdollartoappreciate,leadingexportsfromtheUnitedStatestobecomerelativelymoreexpensiveinothermarkets.

TariffswillshieldUSprod