Forecast Calls for Slight Economic Boost in 2025

Businesses can look forward to a gradually improving operating environment in 2025, thanks to lower interest rates, moderating inflation and steady—if unspectacular—growth in the nation’s overall economic activity.

“We look for real gross domestic product (GDP) growth of 2.5% in 2025,” said Bernard Yaros Jr., lead U.S. economist at Oxford Economics. (GDP, the total value of the nation’s goods and services, is the most commonly utilized measure of economic growth. “Real” GDP subtracts the effects of inflation).

The good news is that a 2.5% boost is not far off from what economists see as the nation’s “natural growth rate”—one that supports business activity and maintains full employment. A reduced volatility in the GDP growth pattern in recent years suggests the nation may be on the path to a “soft landing,” avoiding a recession after a lengthy inflationary binge (see chart on page 34).

Despite its positive nature, the 2025 GDP figure is slightly lower than the 2.7% anticipated when 2024 numbers were finally tallied. That’s because the nation is in a “late-stage expansion,” characterized by a tendency to slow down while maintaining sufficient force to invigorate commercial operations.

Fair Winds

“We anticipate a federal funds interest rate of 2.75% by the end of 2025, down from a recent 4.75%,” Yaros said. “And we look for inflation to average 2.2% in the final quarter of 2025, which will be within spitting distance of the (Federal Reserve’s) 2% target.”

This would be an improvement from the 2.5% inflation level seen toward the end of 2024. (This represents the Fed’s preferred measure of inflation, the core personal consumption expenditure deflator, which strips out volatile food and energy prices). Relief from the costs of interest and inflation will help fatten the bottom lines of businesses.

“We anticipate corporate profits will increase 9.6% in 2024 and 9% in 2025, up from their 6.9% gain in 2023,” Yaros said.

Reports from the field confirm the economists’ optimistic view.

“Our members are looking forward to a growth year in 2025, largely from expectations that interest rates will decline,” said Tom Palisin, executive director of the Manufacturers’ Association, a Pennsylvania-based consortium with nearly 500 member companies. “High interest rates have been putting constraints on many of our members who have been trying to maintain their financial margins, so relief in this area will be helpful.”

Healthy Employment

“We look for consumer confidence to move slightly higher in 2025,” said Scott Hoyt, senior director of consumer economics for Moody’s Analytics.

Why the optimism? Because of healthy employment levels.

“We look for the unemployment rate to end 2025 at 4.2% and 2026 at 4.2%,” Yaros said.

This is in line with the 4.1% reported toward the end of 2024. Many economists hold an unemployment rate of 3.5% to 4.5% as the “sweet spot” that balances the risks of inflationary wages and economic recession.

If favorable unemployment figures encourage consumer spending, employers should also enjoy relief from the deleterious effects of the past year’s tight labor conditions. A slowdown in the rate of hiring has already helped loosen the employment market.

Softening employment growth has given workers less bargaining power, so employers are experiencing some much-needed relief from the rising trendline of worker wages. Entry-level hourly wage increases came to 3.7% in 2024 at Palisin’s member companies, markedly lower than the vigorous 8% to 10% levels clocked for each of the previous two years. Historically, such increases have tended to settle in the 2.5% to 3.0% range. Many national figures concur.“The employment cost index (ECI) is slowing,” Hoyt said, referring to a common measure of average worker wages. “We are forecasting 2.8% growth in 2025, compared to 3.9% in 2024 and 4.5% in 2023.”

Despite the ongoing de-escalation in the ECI, Hoyt said it remains healthy enough to support consumer spending, as does the expected increase in the nation’s total personal income level, an important driver of business activity. Like the ECI, total personal income is expected to follow a familiar 2025 trendline: a healthy increase, despite de-escalation.

“Mainly because of slower job growth, we have the increase in wage and salary income slowing to 4.7% in 2025, compared to our expectation of 6.6% for 2024 and 5.4% for 2023,” Hoyt said.

Maybe it’s a looser labor market, but employers are in no hurry to trim their employee rosters.

“Employers want to maintain their ability to jump on the growth side once the economy rebounds a little,” Hoyt said. “So, employment levels have held fairly steady.”

Housing Rebounds

“We forecast housing starts to increase by 6.2% in 2025, after falling by 4.7% in 2024 and declining 8.4% in 2023,” Yaros said.

Why the rebound? A decline in the cost of money and a concomitant loosening of credit standards.

“Lower mortgage rates should help the single-family home market,” Conerly said. “It will be a little less painful for people with 3% or 4% mortgages to give them up, sell their current houses and move up.”

Lower interest rates should also reinvigorate commercial construction activity—a sector that has been underperforming.

“The nonresidential side has a kind of bad reputation right now, especially when people think of downtown office or downtown retail,” Conerly said. “But office and retail are doing okay in many suburban areas, and a lot of the retail sector has been underbuilt. People thought we were totally abandoning going to the store, and it turns out, we’re not.”

However, many areas of the country may continue to experience lackluster activity when it comes to multifamily residential, hotel and office construction. A change in fortune won’t happen overnight.

“With lower interest rates, there’ll be an easier time lining up project financing at acceptable cost,” said Anirban Basu, chairman and CEO of Sage Policy Group. “But these things take time. We might see some softness in a meaningful fraction of contractors in 2025. And then, perhaps things get a bit better in 2026 as these lower interest rates prompt more activity.”

One sector that will do well out of the gate: Large-scale infrastructure projects, computer chip and battery manufacturing plants and data centers.

“This is the era of the megaproject,” Basu said. “Future prospects are quite positive for contractors who are able to participate in major public works.”

Much of this positivity is driven by the reemergence of industrial policymaking in the U.S., an economic transformation that has led to programs such as the Inflation Reduction Act, the Chips and Science Act and the Infrastructure Investment and Jobs Act.

All told, while economists expect lower interest rates to fuel a positive turn, they are hedging their bets. “We look for business investment to rise 4.1% in 2024 and 4.1% in 2025, compared to 6.0% in 2023,” Yaros said.

Supply Chains

“Logistical issues are persuading many CEOs to place production closer to final consumers,” Basu said. “There is also a trend toward favoring nations that provide significant protection for intellectual property.”

Relief from delivery disruptions can’t come soon enough.

“We are seeing shortages around semiconductor chips and some other technological products, as well as chemicals, equipment assemblies and metal parts,” Palisin said.” That’s causing production delays and late deliveries.”

Palisin cites several causes for supply chain issues. Over the past year, the nation has lacked sufficient skilled workers to meet production demands. In an environment of high interest rates and slowing growth, some companies did not invest as much as required in new facilities.

“As for the semiconductor situation specifically, there’s this huge demand coming up against a shortfall in global supply,” Palisin said.

While the U.S. is committed to the reshoring of production, the task of increasing domestic manufacturing and delivery systems will take time.

“We are not going to turn things around right away,” Palisin said.

The Road Ahead

• Interest rates: “Going forward, the major concern for businesses will be the pace of interest rate cuts and where they will end up,” Yaros said.
• Inflation: “If the consumer price index returns to positive territory, that could throw a monkey wrench into many business plans,” Conerly said.
• Tariffs: “Tariffs amount to price increases for our members who have to buy materials from abroad,” Palisin said.
• Geopolitics: “An increasing level of turmoil around the world can disrupt supply chains, throwing a monkey wrench into the economy,” Conerly said.

Concerning as these risks are, economists anticipate a fairly benign operating environment in 2025.

“The U.S. economy has been remarkably resilient, despite all the hits it’s taken over the past few years,” Yaros said. “We don’t anticipate a recession, as the Federal Reserve will be dialing back the restrictiveness of monetary policy, and there are no glaring imbalances in the economy.”