ICIS Economic Outlook: Policy uncertainty clouds US economic outlook but fundamentals solid

CHARLOTTE, North Carolina (ICIS)–There is uncertainty about the extent that stated US policy goals on tariffs will be achieved and their impact on the economy this year and beyond. Yet for now, the US economy remains on solid ground.

An extension of the 2017 tax cuts would be positive, as would deregulation and higher defense spending. On the other hand, immigration restrictions and tariff increases would take away from growth and could foster inflationary pressures. It is possible that new tariffs will be measured.

Higher inflationary pressures of late have raised interest rates, which could subtract from US growth.

It is clear from looking at year-earlier comparisons that the US economy is slowing. The US remains in the late stage of the business cycle, but there is likely more room for the economy to run.

December featured a solid employment report. There are 1.1 job openings per unemployed person, a level back to pre-pandemic levels. With a balanced labor market, incomes are holding up for consumers and providing support for the US economy.

The headline December Consumer Price Index (CPI) was up 2.9% year on year, a third month of higher comparisons. Economists expect inflation to average 2.5% this year, down from 2.9% in 2024, 4.1% in 2023 and 8.0% in 2022. This is still above the Fed’s target.

CPI inflation is expected to stabilize at 2.5% in 2026 and soften to 2.3% in 2027. That said, expectations of stronger growth and higher inflation have pushed up interest rates, as measured by the 10-year Treasury yield.

US MANUFACTURING PMI IMPROVES
Turning to the production side of the economy, the December ISM US Manufacturing PMI registered 49.3, an improvement from November’s reading.

Overall manufacturing production contraction moved into positive territory, and new orders strengthened further. Order backlogs and inventories moved closer to breakeven, suggesting the start of a restocking cycle. Seven of the 18 industries surveyed expanded.

The ISM US Services PMI rose 2.0 points to 54.1, a good expansionary reading.

The Manufacturing PMI for Canada was in positive territory for a fourth month while that for Mexico contracted again slightly. Brazil’s manufacturing PMI expanded for a twelfth month, but at a slower pace.

Euro area manufacturing has been in contraction for 30 months. The UK PMI remains in contraction. China’s manufacturing PMI was slightly positive for a third month, indicative of a stalling recovery.

AUTO AND HOUSING OUTLOOK
Turning to the demand side of the economy, light vehicle sales improved again in December, and although inventories have moved up this past year, they remain low. Affordability continues to be the issue and is providing headwinds, although the year ended on a solid note.

We expect light vehicle sales of 16.31 million in 2025, before improving to 16.53 million in 2026 and 16.95 million in 2027. This would bring activity back to the last peak in 2018.

Housing activity continues to be muted amid affordability issues as 30-year mortgage rates returned to over 7%, along with low builder confidence.

We expect housing starts will average 1.41 million in 2025 and improve to 1.45 million in 2026 and to 1.59 million in 2027. Demographic factors will support activity through the end of the decade. There is significant pent-up demand for housing and a shortage of inventory.

RETAIL SALES PICK UP
Retail sales were lackluster for much of this year, but Q4 results were robust. Sales at food services and drinking places also remained positive. Overall consumer spending continues to improve but may be slowing.

Business fixed investment has been languid of late, but led by a need to boost productivity and by reshoring initiatives, this will take over from consumer spending as a driver of the US economy. This is typical in the late-stage of the business cycle.

US GDP FORECAST
US GDP rebounded 6.1% in 2021 and then slowed to a 2.5% gain in 2022. The much-anticipated recession failed to emerge for a variety of reasons, and in 2023, the economy expanded 2.9% followed by an estimated 2.7% in 2024. This pace is well above long-term growth potential.

Q4 2024 economic growth will be strong, but a slowdown in quarterly economic gains towards long-term growth potential suggests that in 2025 the economy could rise 2.2%, followed by another 2.2% gain in 2026 and 2.0% growth in 2027.

Deregulation, energy and tax reform as well as other initiatives could aid economic growth.

The US continues to outpace other advanced nations. Recent results suggest that Europe’s economic prospects appear stagnant amid many structural and competitiveness headwinds.

China appears to be attempting to export its way out of a soft economy. The stimulus provided will likely have only a modest effect on improving growth prospects and rising trade tensions may hinder growth.