As 2024 drew to a close, the U.S. economy demonstrated resilience despite ongoing policy debates and persistent inflation concerns. In a notable development, the Conference Board Leading Economic Index (LEI) rose in November for the first time since February 2022. This index, which tracks ten key indicators to forecast economic turning points, suggests positive momentum for future economic activity. Against this backdrop, a new political chapter began in Washington, D.C., as the Trump administration assumed office on January 20, 2025. Key policy areas—including tariffs, taxation, deregulation, immigration, and international relations—are expected to shape the legislative agenda, with broad implications for financial markets and the economy.
Meanwhile, the Federal Reserve continued its efforts to manage inflation, implementing a third consecutive rate cut in December. This adjustment brought the federal funds rate to a range of 4.25%-4.50%, marking a quarter-point reduction. While inflation has moderated toward the Fed’s 2% target, it remains slightly elevated. More recent CPI readings indicate further reductions may be pushed off until later in the year.
If early 2025 avoids a resurgence of inflation similar to early 2024, the Fed’s 2% target may come within reach. GDP growth slowed slightly to 2.5% year-over-year but remained solid, supported by steady consumer spending, strong corporate earnings, and a rebound in business applications. While elevated interest rates pose challenges for capital investment and labor market softness persists, the broader economy appears positioned for continued—albeit uneven—expansion.
Looking ahead, the primary risks include potential inflationary pressures stemming from new tariffs and broader macroeconomic adjustments to the evolving rate environment. Nonetheless, our outlook projects sustained economic growth through 2027, with a potential plateau emerging in late 2026. The key question is not whether growth will continue, but how the economy will adapt to shifting policy dynamics, inflationary trends, and global trade developments.
Here is a summary of the economic metrics we follow:
Retail Sales/Labor Market:
The U.S. retail sector demonstrated strong performance in the fourth quarter of 2024, driven by steady consumer demand and a robust holiday shopping season. Despite economic uncertainties, retail sales continued to support overall economic growth.
Overall Performance
Total Sales: Advance estimates from the U.S. Census Bureau indicated that December 2024 retail and food services sales reached $729.2 billion, reflecting a 0.4% increase from November and a 3.9% year-over-year gain.
Quarterly Growth: The Conference Board reported that real retail sales of goods and food and beverage services grew at an annualized rate of 4.1% in Q4, consistent with the strong pace observed in Q3.
Key Sector Trends
Core Retail Sales: Excluding autos, gasoline, and food services, core retail sales outpaced the broader sector, rising 4.2% overall and 2.3% in inflation-adjusted volume.
December Performance: According to Colliers, total retail sales increased by 3.8% for the month, with inflation-adjusted sales volume up 1.6%, highlighting sustained consumer spending momentum.
Challenges and Outlook
Consumer Spending Resilience: Despite potential economic headwinds, consumer demand remained strong, supporting above-trend consumption growth heading into early 2025.
Inflationary Pressures: While inflation showed signs of moderation, price fluctuations in key retail categories could influence spending patterns in the coming months.
In summary, the retail sector maintained solid momentum in Q4 2024, bolstered by strong consumer activity and seasonal demand. While ongoing economic factors may present challenges, retail sales are expected to remain a key driver of economic stability into 2025.
Construction:
In the fourth quarter of 2024, the U.S. construction industry exhibited a mix of resilience and challenges across various sectors.
Overall Performance:
Spending Growth: Total engineering and construction spending in the U.S. was projected to end 2024 with a 5% increase.
Construction Costs: The national average increase in construction costs was 1.11% in mid-Q4 2024, consistent with the previous two quarters. Cities like Boston, Chicago, Honolulu, Las Vegas, Phoenix, Seattle, and Washington D.C. experienced above-average cost increases.
Sector-Specific Insights:
Residential Construction: In December 2024, U.S. construction spending rose by 0.5%, driven largely by a 1.5% increase in residential construction. Investment in single-family homebuilding increased by 1.0%, while multi-family housing saw a slight decline of 0.3%.
Nonresidential Construction: The Nonresidential Construction Index (NRCI) for Q4 2024 was 48.4, a slight improvement from 47.2 in the previous quarter, indicating ongoing challenges in the sector.
Challenges and Outlook:
Material Costs: Material costs stabilized over the last quarter, attributed to increased market confidence following the Federal Reserve's decision to lower its target interest rate in September. However, regional price trends for certain materials persisted.
Labor Market: The industry continued to face skilled labor shortages, leading to increased wages. This trend is expected to persist, especially in regions benefiting from heightened public infrastructure investments.
In summary, while the U.S. construction industry demonstrated stability in Q4 2024, it navigated a complex landscape of sector-specific performances, cost fluctuations, and labor challenges. The outlook remains cautiously optimistic, with expectations of continued growth tempered by ongoing economic uncertainties.
Manufacturing:
The U.S. manufacturing sector experienced a mix of modest growth and persistent challenges in the fourth quarter of 2024. While key indicators showed signs of stabilization, demand concerns and trade uncertainties continued to weigh on the industry.
Economic Indicators
Core Capital Goods Orders: Non-defense capital goods orders, excluding aircraft, rose by 0.7% in November following a 0.1% decline in October. This increase, driven by strong machinery demand, signals a potential rebound in business investment.
Purchasing Managers' Index (PMI): The Institute for Supply Management’s PMI improved to 48.4 in November from 46.5 in October, indicating a slower pace of contraction. Although still below the expansion threshold of 50, this upward movement suggests potential stabilization in manufacturing activity.
Key Challenges
Demand Weakness: Manufacturers continued to report sluggish demand, with many adopting a cautious outlook for 2025 due to lingering uncertainties following the election cycle.
Trade Uncertainty: Concerns over trade policy intensified, with 56.1% of manufacturers identifying it as a primary challenge in Q4, up from 36.8% in Q3. Large manufacturers were particularly affected, with 68.7% expressing significant apprehension.
Labor Market Trends
Employment Conditions: While employment levels showed signs of stabilization, they remained below expansionary levels. Workforce attraction and retention continued to be a major concern, with 55.8% of manufacturers citing labor shortages as a key issue.
Despite ongoing challenges, the manufacturing sector demonstrated resilience. The increase in core capital goods orders and the improvement in the PMI suggest early signs of stabilization. However, persistent demand weakness, trade uncertainty, and labor constraints indicate that recovery may be gradual.
Services:
The U.S. services sector maintained growth in the fourth quarter of 2024, though expansion slowed compared to earlier in the year. While consumer activity remained a key driver, businesses faced ongoing cost pressures that influenced pricing and profitability.
Sector Performance
Business Activity: The Institute for Supply Management (ISM) reported a decline in its non-manufacturing Purchasing Managers' Index (PMI) to 52.1 in November, down from 56.0 in October. Although the index remained in expansionary territory, the slower pace of growth reflected shifting economic conditions.
Revenue Trends: Service-based businesses, particularly in professional services and healthcare, experienced steady revenue growth. However, rising costs in areas such as wages and supplies led to tighter profit margins for many firms.
Cost Pressures and Market Dynamics
Labor Market Impact: Staffing challenges persisted across various service industries, with wage growth continuing as businesses competed for qualified workers. These pressures were especially pronounced in customer-facing roles.
Input Costs: Rising expenses for transportation, utilities, and service-related goods added to financial strains, prompting some businesses to adjust pricing strategies.
Forward-Looking Considerations
Market Adaptation: Companies increasingly focused on operational efficiencies, automation, and strategic pricing adjustments to mitigate cost burdens.
Economic Conditions: While demand remained stable, businesses monitored evolving monetary policy and consumer confidence levels, which could shape spending behavior into 2025.
Despite a slowdown in growth, the services sector remained resilient amid shifting economic conditions. Labor and cost challenges persisted, requiring businesses to adapt strategies to maintain stability in an evolving market environment.
Specific Items to Consider at the Macro Level are:
Retail Sales:
Adjust to consumer shopping preferences. Consider how you can integrate the in-store experience with your e-commerce platform to best suit your customers preferences.
Additionally, in-Store Retail Sales are tentatively rising. Review your physical retail footprint to ensure it meets consumer expectations.
Consumers are generally on solid footing. Have a plan on how to pass along cost increases to the consumer or improve efficiencies.
However, consumers across income brackets are looking for value for money. Ensure your marketing team balances your brand with your target market’s mood.
Construction:
Regional variation in Starts is likely. Ensure you are up to date with current market trends in your geographic area.
Make sure to plan at least half a business cycle ahead. This year will be the time to consider investments that will allow your business to grow during the rise in 2026.
Highlight your competitive advantages to set yourself apart from the competition.
As always … Cash is king … Build up an adequate cash buffer now to prepare for the continuing slowdown through 2025.
Manufacturing:
Given that inflation is not expected to fluctuate from current levels, is your business prepared to compete in a higher-price environment?
Ensure your quality control processes are adequate to keep pace with expected growth this year and in 2026.
We anticipate interest rates will remain at current levels in the coming quarters. Make moves now to decide whether to finance capital goods to lock in known rates.
Reduce risk by sourcing materials from multiple suppliers and/or countries to mitigate disruptions.
Services:
Conduct market research to get a better gauge of your customers’ financial standing. Adjust your product/services mix accordingly.
Lean into your brand differentiators or consider expanding into value propositions that mitigate ongoing price sensitivity.
As always, upgrade staff skills. Level up the technical and soft skills of the service delivery staff through training.