According to Bloomberg, the main reason for the US economy to beat expectations is the spending power of consumers. Although the pace of hiring has slowed, incomes have increased faster than inflation and household wealth has reached a record. This helps household spending increase 2.8% in 2024, higher than in 2023 and far exceeding previous forecasts.
High-income groups continue to be the main drivers, benefiting from rising home prices and the stock market. Meanwhile, low-income consumers are increasingly relying on credit cards and debt, leading to rising delinquency rates.
But those purchasing power boosters are starting to lose steam. Pandemic-era savings have all but dried up and the household savings rate has fallen to its lowest level in years, raising questions about whether consumer spending can continue to underpin the economy next year.
While consumer spending remains strong, signs of weakness in the labor market and manufacturing sectors have begun to emerge. Employment is falling, unemployment is rising slightly, and workers are finding it harder to find new jobs.
In the manufacturing sector, manufacturing had a weak year, with job losses and new investment constrained by high borrowing costs. The outlook is also challenging as President-elect Donald Trump is expected to implement tariffs and labor reforms, which could put further pressure on supply chains and the labor market.
While inflation fell sharply in the first half of the year, progress slowed in the final months of the year. The core PCE index, the Federal Reserve's preferred inflation gauge, hit 2.8% in November, above its 2% target. The Fed cut interest rates by 1 percentage point in 2024 to support the economy, but Chairman Jerome Powell said more progress was needed to control inflation before considering further cuts in 2025.
The housing market remains challenged by high borrowing costs. Mortgage rates are nearing 7%, making mortgage payments less affordable. While home sales have stabilized, they remain significantly lower than pre-pandemic levels.
Manufacturing has fared no better, as high borrowing costs have hampered investment in new infrastructure. That has made manufacturing one of the weakest spots in the U.S. economy this year. Durable goods companies have had to cut jobs to cut costs, adding to the pressure on the labor market.
While the US economy remains the leader among the G7, signs of weakness in consumption and employment suggest that 2025 could be more difficult. President-elect Trump’s policies are expected to impact economic growth, requiring timely adjustments to maintain momentum.
