Economic growth in the United States was much stronger in 2024 than many had anticipated, especially with the higher interest rate environment that dominated a good part of the year. As Kavan Choksi mentions, real (inflation-adjusted) disposable income growth remained fairly robust in 2024, which helped shield certain consumers from high interest rates. Moreover, many corporations also continued to sit on a large amount of cash, which ultimately propelled business investment even in the high-rate environment.
Kavan Choksi talks shed light on the United States economy and consumer spending
2025 is likely to be characterized by continued solid economic growth. GDP or Gross Domestic Product growth is likely to return near trend in 2025, at a rate of 2.1% year-over-year (YoY). With the Federal Reserve trimming rates, continued consumer spending and business investment, would be important growth drivers. 2025 is also expected to be a year of policy-induced uncertainty. A number of economists believe that the impact of the recent US presidential election on the global economy may cause a long-term shift instead of a short-term disruption. Significant changes are particularly expected in areas like migration, deregulation, fiscal policy, industrial policy and trade.
The composition of consumer spending in the year of 2025 is expected to be shaped by the timing of interest rate cuts. The high borrowing cost during the first half of the year is likely to ease by the second half, with the Federal Reserve trimming the interest rates. This would lead to a reduction in borrowing expenses, and cause an uptick in less frequent, large-ticket purchases. Lower borrowing costs may even boost home sales, providing a boost to furniture purchases and home improvement projects as well. Automobiles are another big-ticket item that is expected to be benefited from lower rates. Lower financing expenses would make EMIs more budget-friendly, and also make it easier for consumers to qualify for auto loans. Lower interest rates may even cut down the expenses incurred in leasing a vehicle, thereby further driving renewed demand in the auto sector.
Kavan Choksi, however, does mention that a pivot to more big-ticket purchases in the second half of 2025 might not be true for all consumer demographic. Affluent and middle-income consumers are expected to fare better than lower-income consumers. Affluent consumers are particularly likely to thrive, and benefit from increasing real wages, a strong labour market, rising home prices, as well as a booming stock market. The majority of these consumers have substantial savings, and also benefit from long-term, fixed-rate mortgages at low rates. In a similar manner, middle-income consumers are expected to do reasonably well. These consumers are likely to be homeowners, and also have modest 401(k) plans. Middle-income consumers did spend cautiously in 2024, but continued to support consumption. The wealth profiles, savings and income of affluent and middle-income consumers are the major reasons why these demographics are expected to be in a strong position to support consumer spending growth in 2025.
2025 marks the start of a new, Republican-controlled administration and Congress. However, outside of the announced tariffs, most major policy changes are likely to impact the economy in 2026.
