Mixed Signals
Economic signals are mixed. Inflation is easing, real incomes are rising, and employment is at record highs. However, interest rates remain elevated, muting demand for large-ticket items that are typically financed, and some demographics are under strain from the cumulative inflation of recent years. The industrial sector and B2B spending are plateauing, while US Single-Unit Housing Starts have hit a bump in the road. Consumer spending is keeping things moving, but it is also cutting into consumers’ saving ability.
As we wrap up 2024 and head toward 2025, there are some key factors to keep in mind:
- Interest Rate Cuts: The Federal Reserve is likely to cut interest rates in the near term given abating inflation, but rates will likely come down gradually. Lower rates will provide an eventual boost for markets, such as durable goods and construction, and will offer some relief for consumers holding floating-rate debt, such as credit card debt. The direction of the impact is only half the story; the other key element for planning is the timing, which is unique to your specific business and market. The effects of interest rate cuts are unlikely to be instantaneous, instead taking time to develop. Some potential buyers may remain on the sidelines waiting for further cuts. In some markets, such as nonresidential construction, it can take between months and years for projects to go from conception to completion. Consider the stage of your market – using a construction analogy, are you or your customers doing the site work, putting up the framing, or painting the walls?
- Residential Construction: Prior rise in leading US Single-Unit Housing Starts is a solid signal for cyclical rise in the macroeconomy to come, but a recent tick down in Starts suggests there could be some waffling in the macroeconomy during 2025. We will be watching closely to see how reactive this sector is as rates are lowered. A tepid response in this market could pose a risk of stagnation in other sectors dragging on longer.
- Stock Market Volatility: In recent years, the S&P 500 has been rising faster than US Corporate Profits, a growing risk factor for stock valuations. Avoid conflating the stock market with the economy, as it is only a small part of the picture and is prone to volatility. Talk to your financial advisor to ensure that your portfolio matches your risk profile.
- Employment: The labor market has loosened somewhat but remains robust. Keep in mind that employment decisions lag the macroeconomy, so slowing growth in employment is a reaction to prior macroeconomic softening, not a harbinger of the future. Demographic trends suggest that the labor market will be tight in the coming years . Look for ways to reduce your dependence on labor, if possible. Take an active approach to managing employee morale and retention; otherwise, your growth in 2025-26 could be throttled by labor challenges.
Growth in 2025—Albeit Mild Growth—Brings Opportunities and Challenges
There are tentative signals that 2025 will be a somewhat stronger year than 2024, including a rise in the ITR Leading Indicator™ and the ITR Retail Sales Leading Indicator™. For businesses closely tied to the industrial economy, now is the opportune time to assess labor and capital needs in preparation for the growth expected in 2025 and 2026.
It is also important to be proactive in addressing longer-term challenges ahead, including the potential for higher energy prices, margin compression, and labor shortages. Reacting to changes alongside everyone else may result in missed growth opportunities – now is the time to get ahead of the curve.
*Note: Many of the market forecasts were revised this quarter due to annual data revisions by the US Census Bureau and Federal Reserve Board.
