Economic growth withstood inflation, high interest rates, and other challenges in 2024 and is expected to continue showing strength in 2025, according to National Retail Federation Chief Economist Jack Kleinhenz.
“The US economy ended 2024 on a high note, and the outlook looks promising for 2025,” Kleinhenz said. “Recent performance indicates that the economy is on solid footing and has been growing at a steady pace, above its historical average. The labor market is healthy, unemployment is low, inflation has fallen almost to the Federal Reserve’s target—although it remains somewhat sticky—and the direction of interest rates remains lower.”
“I don’t want to get ahead of our annual forecast, but there is good reason to expect healthy economic growth in 2025, even though its trajectory will depend on a number of moving parts,” Kleinhenz added. Key factors could include changes to trade, immigration, regulation, tax and spending policies, and their effects on economic activity. “However, the resilience of the US consumer should hopefully remain a key theme.”
Kleinhenz’s comments were made in the January edition of NRF’s Monthly Economic Review, which noted that 2024 gross domestic product was on track to grow 2.7% over 2023, based on data from the first three quarters and the first two months of the fourth quarter. GDP is expected to grow between 2% and 2.5% in 2025, though “the range of uncertainty is wide and this estimate could change.”
The past year was largely defined by the impressive resiliency of the consumer and a sturdy labor market, with consumer spending supported by low unemployment and wage gains that outpaced inflation, even as employers slowed hiring, Kleinhenz said.
As of the week ending December 21, ongoing claims for unemployment insurance stood at 1.8 million—40,000 higher than a year earlier. New filings fell from 219,000 that week to 211,000 the following week. Average hourly wages were up 4.4% on an annualized three-month average in November.
Year-over-year inflation, as measured by the Personal Consumption Expenditures Price Index followed by the Fed, fell to 2.4% in November. This is close to the Fed’s goal of 2% and substantially lower than the 3.9% year-over-year increase in wages, as measured by the quarterly Employment Cost Index.
Consumer spending on both goods and services grew 5.5% year-over-year, unadjusted for inflation, in November and December combined, while disposable personal income was up 5.2%, year-over-year, boosting consumer purchases. Core retail sales, as defined by NRF—excluding automobile dealers, gasoline stations, and restaurants—were up 4% year-over-year on a three-month moving average as of November, and up 3.8% for the first 11 months of the year. While December figures won’t be released until next week, spending is on track to meet or exceed NRF’s projected holiday shopping season growth of between 2.5% and 3.5% over 2023.
Throughout 2024, there was a disconnect between strong consumer spending and weak consumer confidence, with shoppers still concerned about high prices even though most inflation is now in services rather than goods. However, optimism is on the rise, with the University of Michigan consumer sentiment index increasing 3.1% to 74 in December, marking its fifth consecutive monthly increase and the highest level since last April.
Following a quarter-point reduction in interest rates in December, the Fed is attempting to “thread a needle” by lowering rates at a pace that won’t undo recent progress on inflation, Kleinhenz said. As a result, Fed officials have indicated that they are likely to reduce rates by only half a point in 2025, rather than the previously expected full percentage point.