By Blerina Uruçi

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U.S. exceptionalism has not run out of steam

The ingredients are there for another year of robust growth.

November 2024, On the Horizon -

The ingredients are present for another year of robust growth in the U.S. In recent years, healthy expansion in the U.S. has spilled over to the rest of the world, helping offset the softness in Europe and China. We expect this to continue in 2025.

The U.S.’s economic outperformance over the rest of the world during the past few years was not merely down to consumers “buying stuff.” Nonresidential investment has also been strong in response to incentives put in place by fiscal policy. The continued development of AI‑related technologies and the green energy transition have been important in supporting investment growth and what could be the start of a much‑needed upgrade in the capital stock of the U.S. economy.

The positive fiscal impulse in the U.S. is now fading, but fiscal measures such as the Inflation Reduction Act and the CHIPS and Science Act should ensure further disbursement of tax incentives and industry‑specific grants during the coming years.

Coordinated easing provides supportive backdrop

The recent monetary policy easing will likely provide a more supportive macro backdrop for U.S. and global demand than in 2022–2023. After all, it has been rare to witness such a coordinated and widespread easing of monetary policy and financial conditions outside of a global downturn. This relaxing of financial conditions has already helped boost the wealth and balance sheets of U.S. consumers.

Despite this positive backdrop, job creation will likely slow down in 2025 as companies have front‑loaded hiring and are likely to focus on productivity improvements. But without a catalyst for mass layoffs, we expect the unemployment rate to remain low by historical standards. The notable increase in productivity growth in recent quarters should support robust wage gains. Coupled with the downshift in inflation rates, real disposable incomes are likely to be another tailwind to growth.

On the inflation front, raising existing tariffs and/or imposing additional levies on imports could cause a one‑off price shock. The magnitude would depend on the ability of businesses to pass these higher costs along to consumers, which is hard to predict. Another area to watch is the president‑elect’s vow to tighten immigration policies. A tough stance here could result in a negative shock to the supply of workers, tightening U.S. labor markets. Unlike higher tariffs, such a scenario likely would have a more sustained impact on prices.

Improving productivity can boost economy

Improving productivity could also foretell the end of generally lackluster growth after the GFC, excluding the recession at the onset of the coronavirus pandemic and the boom that came following the reopening of the economy. Positive productivity shocks are rare, and it is even rarer to be able to predict them correctly.

However, some of the factors that historically have driven productivity improvements seem to be in place today. Both labor and nonlabor input costs have surged higher, so businesses are looking for ways to deliver the same output levels without hurting profitability (Figure 2).

Higher labor costs have historically led productivity up

(Fig. 2) Productivity growth appears to have bottomed recently

As of April 1, 2024.
Y/Y= Year‑over‑Year.
Source: Macrobond.

In addition, capital and intellectual property investment have paved the way for significant progress on AI and other technologies that have high capital and low labor intensity, thus leading to higher productivity growth outcomes.

Key takeaway
Despite a slowing jobs market, supportive monetary policy and improving productivity should keep the U.S. economy out of recession.

Blerina Uruçi Chief U.S. Economist, Fixed Income

Blerina Uruçi is the chief U.S. economist in the Fixed Income Division. She contributes to the formulation of investment strategy and supports investment and client development activities throughout T. Rowe Price, specifically focusing on the outlook for the U.S. economy, inflation, and monetary policy. Blerina is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc.

Nov 2024 • On the Horizon

Value and small-caps could power international equities

By Justin Thomson

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