How Will Policy Changes Impact U.S. Economic Growth Through 2026?

As the U.S. economy approaches the end of 2024, it finds itself under scrutiny, akin to a medical evaluation. The latest reports indicate that the GDP has reached a record high of $23 trillion, with a growth rate of 2.8% in the third quarter. This growth is part of a broader trend, as the GDP has increased by 10.7% from Q4 2019 to Q2 2024, with projections for the entire year hovering between 2.5% and 2.7% [bc4a27e5][e1e7b44b].

However, Morgan Stanley has projected a slowdown in U.S. GDP growth to 2.4% in 2024, 1.9% in 2025, and further down to 1.3% in 2026. This anticipated decline is attributed to tighter immigration policies, rising tariffs, weakening consumer spending, and reduced business investment [34034cf0]. Employment levels are also at record highs; however, job growth has slowed, leading to an increase in the unemployment rate to a low 4% in 2024. Despite this, average real weekly earnings are reported to be 3% lower than they were four years ago, highlighting a disconnect between employment levels and wage growth [100c9702].

Looking ahead, Tom Jalics, chief investment strategist at Fifth Third Bank, predicts that the U.S. economy will continue to grow, with GDP growth expected at 2.6% in 2024 and 1.9% in 2025. He forecasts the unemployment rate to rise slightly to 4.1%, up from 3.5% last year, while consumer spending, which accounts for 68% of the U.S. economy, remains a critical driver [4fe36859]. However, consumer spending growth is expected to decline from 2.6% in 2024 to just 1.3% in 2026, reflecting the broader economic challenges [34034cf0].

The U.S. economy is expected to undergo a structural change post-pandemic, with growth forecasted at 2.5% or more for 2025, reflecting a 55% probability of this outcome. The unemployment rate is projected to hover around 4.2%, while inflation dynamics are anticipated to remain at or above 2% [b4172707].

In a global context, consumer spending is expected to increase by 6% in 2025, according to NielsenIQ, which surveyed 17,000 respondents from 23 countries. Forrester Research projects a more conservative 3% increase, particularly as inflation remains high in regions like Latin America and Africa. In contrast, U.S. inflation is anticipated to ease, currently sitting at 2.65%, slightly above the Federal Reserve's target of 2% [5faf7589][4fe36859].

The national debt has reached unprecedented levels, with trillion-dollar annual deficits contributing to a debt-to-GDP ratio that raises concerns about future economic stability. This increasing national debt is expected to lead to higher interest rates, which could affect borrowing costs for consumers and businesses alike [100c9702].

Moreover, the Federal Reserve has trimmed interest rates to between 4.5% and 4.75%, with projections indicating a drop to a terminal rate of 3.5% as the Fed likely slows rate cuts. This is part of an effort to stimulate economic growth amid concerns about inflation, which has cooled significantly since peaking at 7.88% in June 2022, now standing at just 2.1% year-over-year as of September 2024 [d699bc34][1aa2069a].

In terms of productivity, the last five decades have seen federal regulations double, potentially hindering productivity growth. As the economy adapts to technological advancements, particularly in artificial intelligence, there are growing concerns about the adequacy of education and training for the future workforce [100c9702].

Consumer spending remains a crucial driver of economic growth, with a surge of 3.7% in Q3 2024. However, public sentiment is mixed; while U.S. workers are earning more than they did in 2019, 52% of Americans feel worse off than four years ago, largely due to rising housing costs and inflationary pressures [bc4a27e5][48d933fb].

The housing market faces a significant shortage of approximately 3.8 million homes, which poses challenges for affordability and availability [b4172707]. Looking ahead, forecasters anticipate job gains of approximately 208,400 per month in 2024, decreasing to 134,100 per month in 2025. The unemployment rate is projected to rise slightly before stabilizing [8a7f5b43]. Overall, while the economic health of the U.S. is rated as 'fairly good, but with room for improvement,' the interplay between economic indicators and public perception will be crucial as the nation navigates the coming months [100c9702]. Brands that innovate and provide value are expected to find new opportunities in this evolving landscape, as consumers redefine discount shopping, with 65% preferring bulk purchases [5faf7589].

In the global market, significant shifts are anticipated for 2025, with metal prices having fallen by approximately 7% in Q3 2024 due to weakened industrial activity in China. The World Bank predicts further declines of 0.9% and 3% for metal prices in 2025 and 2026. Meanwhile, Malaysia's exports grew by 1.6% year-on-year in October 2024, while imports increased by 2.6%. The U.S. trade environment faces challenges from potential new tariffs under President-elect Trump, prompting logistics firms to prepare for supply chain disruptions. Additionally, inflationary pressures may affect consumer pricing models, making effective inventory management crucial for businesses in 2025 [cd2ecc09].