Savannah Chamber

8 2 In addition, large annual federal budget deficits contribute to inflation, too. For these reasons, we expect inflation to remain at 3.0 percent in 2025. Indeed, over the next decade, we believe inflation will average about 3 percent per year compared to 2 percent per year prior to the pandemic. Eventually, we believe the Federal Reserve will raise its implicit – if not its explicit – inflation target to at least 2.5 percent from 2 percent. One reason the economy will grow more slowly rather than contract is that we expect the Federal Reserve to lower policy interest rates by about 25 basis points per quarter in 2025, or by 100 basis points for the year. Another reason we expect the economy to grow very slowly rather than contract is because the labor market will remain resilient. Spending by households and businesses will grow rather than contract. Statistically, consumer spending is the main driver of the US economy and will make the largest contribution to GDP growth in 2025. We expect inflation-adjusted consumer spending growth to grow by about 2 percent, which equals the pace of growth expected for 2025. We expect business' spending on nonresidential investment to grow by about 3 percent. Businesses' spending on intellectual property and equipment growing faster than their spending on structures. In 2025, single-family housing will add to GDP growth, but multi-family homebuilding will subtract from GDP growth. Federal spending will subtract slightly from GDP growth, but spending by state and local governments will contribute to GDP growth. The net contribution of the government sector will be slightly negative. In addition, net exports and inventory changes will subtract slightly from US GDP growth. As noted, we expect economic growth to slow, and the slowdown will be gradual. Specifically, inflation- adjusted GDP will grow by 1.6 percent in 2025 compared to 2.5 percent in 2024. GDP grew by 2.5 percent in 2023. The slowdown in job growth will be more pronounced than the slowdown in GDP growth. Non-farm employment will grow by 0.6 percent in 2025 compared to 1.2 percent in 2024, 2.3 percent in 2023, and 4.3 percent in 2022. The unemployment rate will rise slightly from 4.1 percent in 2024 to 4.3 percent in 2025, an increase of 0.2 percentage points. The rise in unemployment therefore will not be enough to trigger a pullback in consumer spending. Consumers will continue to increase spending at a moderate pace, but the composition of spending will shift away from luxuries towards necessities. Consumers will be more price sensitive that at any time since the pandemic related lockdowns ended. Although GDP growth will slow, we expect employers to hold onto workers more tenaciously than usual given recent difficulties filling positions. The emphasis will be on slowing hiring and reducing hours worked rather than layoffs. That will help ensure that a recession is avoided. Nominal personal income will grow by about 4.1 percent in 2025, which is only slightly slower than the 4.3 percent pace expected for 2024. Inflation was 8.0 percent in 2022, 4.1 percent in 2023, and 3.0 percent in 2024. We expect inflation will be 3.0 percent in 2025. Our baseline forecast assumes that nothing else will go wrong with the US economy. If that sanguine assumption holds, we believe the odds favor expansion over recession, modest job growth, low unemployment, low inflation, and steady home prices. Consumer Spending On an inflation-adjusted basis, we expect personal consumption expenditures to increase at an annual rate of about 2 percent in 2025, which is about the same gain estimated for 2024. The modest growth in consumer spending reflects (1) exhaustion of most of the excess savings households accumulated during the pandemic, (2) higher – but still low – unemployment, (3) less job hopping (lower quit rates), (4) some erosion of the relatively strong economic and financial positions households achieved over 2021-24, and (5) steady home prices. Consumers spent more on an inflation-adjusted basis in 2022-24 by using most of the unanticipated excess savings accumulated during the first two years of the pandemic. Now, households' excess savings is mostly, but not entirely, depleted. Older, higher-income, high-net worth households saved the most and appear to be using a lot of their unplanned accumulations as retirement savings – or to fund long-term investments – and did not spend the money aggressively in 2022-24. In contrast, low- and middle-income consumers spent down their excess savings. The demographics of the big savers therefore will spread the spending from accumulated savings over many years, which will advantage the businesses that cater to their needs. Households' excess savings therefore will continue to support consumer spending in 2025, but to minor extent compared to 2022-24. We expect a personal savings

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