Thriving, not just surviving: Your guide to U.S. economic uncertainty

Yogesh Prasad, CFA, CAIA

CEO & Founder of Confluent Asset Management

The US economy has been a paradox: strong toward the end of 2024 juxtaposed against an uncertain 2025. This year has borne witness to significant growth led by a strong customer base coupled with government assistance while the future is still somewhat hazy.

So, let us take a look at how the US economy is really doing?

Solid finish amid lingering concerns

We find this year 2024 to be a good year for a country that hasn’t yet been a bit resilient. Consumer spending is the largest driver of the US economy and is again defying expectations brought about by some amid higher expenses and growing debt burdens amid rising Much of this partially reflects strong wage growth and a healthy job market and lingering government stimulus.

Government Investments Driving Economic Growth: Government funding for infrastructure, research and development and other initiatives has provided a significant boost to the economy. These investments have supported businesses created jobs and stimulated economic activity created additional jobs and created jobs in Singapore.

Strong job market: Low unemployment rates and continued job creation have provided a strong foundation for consumer spending. The labor sector has remained resilient in spite of a slowdown in the economy.

US civilian unemployment rate

Rising Wages Boost Economic Momentum: A tight labor market has driven up wages. It helps to put more money in the public’s pockets. It has boosted consumer confidence and allowed many families to maintain spending despite price increases.

However, these tailwinds may not stay. The ghost of hyperinflation continues to haunt the economy. However, inflation has not decreased much slowly this past year. Consumer inflation has cooled while services inflation remains stubbornly high. Fuel-efficient rates are driven by rising labor costs, shelter costs and the persistence of supply chain disruptions.

As businesses compete for a limited pool of workers, they must raise wages to attract and retain talent. These higher labor costs are then passed on to consumers as higher costs of goods and services are raised.

The housing market continues to contribute to inflation. Rising rents and house prices are continuing to put a strain on household budgets and impact consumer spending power.

While supply chain issues have eased somewhat while lingering disruptions remain to impact the availability and cost of goods. These disruptions can lead to higher prices for consumers and sting economic growth.

The Fed is treading a delicate tightrope to combat inflation. Aggressive rate hikes have begun to affect the economy, and the Fed faces the challenge of balancing the need to curb inflation with the risk of tipping the economy into recession.

Interest Rate Hike Effects: Increased interest rates increase the cost of borrowing for both businesses and consumers. This slows down economic growth. The recession may cause a loss of jobs, decreased consumer spending, and reduction in productivity.

US 2 year constant maturity interest rate

The Fed needs to balance perfectly between high inflation and the possibility of recession as a part of monetary policy to handle the financial crisis. The balancing act is pretty tricky. It requires caution, a close watch on economic data, and readiness for a course correction when conditions warrant.

Labor market: A mixed bag of problems and opportunities

The labor market in the United States is actually a mixed bag. Although there is continued low unemployment, wage growth has been rather robust, feeding into inflationary pressures. Labor shortages remain a headache in many segments of the economy, squeezing productivity and raising costs.

A low unemployment rate shows that the economy is very healthy and there is enough opportunity within the labor market. However, it adds to inflationary pressure because companies are in competition for just a few employees.

Stronger wage growth underpinned consumer spending but simultaneously induced inflationary pressures.

US weekly wages

One finds labor shortages in most sectors of the economy, starting from health to the manufacturing industries. Such shortages are likely to bring high production costs from all kinds of suppliers as well as reduced productivity coupled with a number of other lower production costs.

This, in turn, challenges the labor market immensely. Since the Baby Boomers continue to retire, it is of essence to recruit and retain young talents to make up for that gap.

Consumers: A powerful economic force

Consumers remain the main driving factor in determining the direction of the future economy. Though consumer spending has been strong, the consumer can quickly forget that this strength does not come without challenges.

Rising Trends in Household Debt: In as much as the wage growth has been strong, numerous households have been piling debt in order to be able to maintain their living standards. This increasing debt burden could dampen consumer spending in the future and raise the risk of financial instability.

US total debt balance

Pressure Mounts on Household Finances: Increased cost of living is squeezing the household budgets, which forces the consumers to make hard choices over their spending priorities. This may lead to a decline in discretionary public expenditure, with a shift towards more essential goods and services.

Consumer confidence is one of the great motivators of economic growth. Business and young consumers are particularly highly relevant. This contributes to confidence in government and consumers. Consumer confidence remains relatively high but sensitive to shifts in the economic outlook. This sensitivity could result in a significant decline in consumer spending in the near future.

US consumer confidence index

Overcoming uncertainty

The road ahead is pretty uncertain. The geopolitical tension, the threat of a trade war, and looming danger of climate change-all three are massive threats to the global economy.

Impact of Geopolitical Risks on the Economy Events such as the war in Ukraine and the current US-China trade dispute can lead to disruptions in global supply chains, higher goods prices, and hurt economic growth.

Economic Challenges of Trade Wars: Trade Wars can lead to higher tariffs and other trade barriers that may increase the cost of goods for consumers and harm businesses.

Events caused by climate change-violent weather and the rise of sea levels-have devastating economic effects. It disrupts supply chains completely, destroys infrastructure, and displaces communities.

On the domestic front, fiscal policy remains a source of uncertainty. The approaching debate on the debt ceiling, along with the possibility of changes in tax policy, is adding to the headwinds facing economic activity.

Controversy Surrounding the Debt Ceiling: Debate over the debt ceiling creates uncertainty and may result in a government shutdown or even a default on US debt. Events like this could strongly hit the economy.

US national debt

Shifts in Tax Policy: A change in tax policy can have a big impact on economic growth and investment.

Embracing adaptability

In the world of turbulence, it is adaptability that’s the word. The requirement for businesses in the wake of turbulent market conditions to take up the challenges in change in market conditions-fast adaptation of their strategies in order to keep themselves competitive.

Agility in Business Responsiveness: Companies should be responsive to altered market conditions through changes in consumer demand, technological innovation, and the entry of new competitors.

It is true that innovation matters for business, as it allows the enterprise to compete and in essence drives economic growth. For example, there are the investments made into research and development, adoption of new technologies, and putting on sale new products and services.

How to support economic growth and address some of the challenges in inflation and inequality-a balance to policymakers.

This is a balancing act that policymakers have to do between growth and inflation. Therefore, it becomes imperative to work out various options facing the policymakers in terms of their impacts on economic growth and inflation.

This is evidenced by the rigidly increasing swelling inequality in the US. It has also reached a point where even policymakers are called upon to take action. Policymakers must foster job creation, improve education and training, and provide a safety net for the vulnerable.

These are the challenges that will frame up the future of the US economy. In building an inclusive, resilient economy, we can ensure a prosperous future for all Americans.

References

The Conference Board: https://www.conference-board.org/

Federal Reserve Bank of New York: https://www.newyorkfed.org/

FRED Economic Data: https://fred.stlouisfed.org/

U.S. Department of Treasury: https://home.treasury.gov/

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