Throughout 2024, U.S. inflation has significantly cooled, driven by easing supply pressures and a slight softening in demand. In response, the Federal Reserve adjusted its monetary policy, cutting rates by 50 basis points in September and 25 in November. However, the surprising factor has been the resilience of real GDP growth, underpinned by structural tailwinds and fiscal dynamics.
Productivity and migration drive growth
According to Karsten Junius, Chief Economist at J. Safra Sarasin, robust economic growth stems from structural forces. Labor productivity has more than doubled compared to pre-pandemic levels, now averaging 1.75% annually. This acceleration is attributed to improved resource allocation post-pandemic and the widespread adoption of AI technologies across sectors.
Additionally, strong net migration has bolstered the U.S. workforce. Since 2021, a surge in undocumented workers has expanded the labor supply, estimated to be around 20 million individuals. While this may artificially inflate productivity data, it has undeniably supported labor markets and economic growth.
Strong private sector balance sheets
Another critical factor is the resilience of private sector balance sheets, which continue to support consumption and labor markets. Household net wealth has further increased in 2024, with debt-to-cash ratios remaining historically low. Corporations, too, maintain healthy profit margins, benefiting from productivity gains and strong pricing power acquired during the pandemic.
Despite slightly weaker demand, businesses have avoided major layoffs due to elevated cash reserves and long-term, fixed-rate debt positions that shield them from rising interest rates.
Outlook and Fed challenges
In the near term, U.S. economic growth is expected to remain strong, supported by favorable fiscal conditions and robust private sector dynamics. However, post-election policy shifts introduce uncertainties. Key areas include potential tax cuts, stricter immigration controls, tariff hikes, and further deregulation.
According to studies by the IMF and Peterson Institute, these measures could elevate inflation and weigh on economic growth. For the Federal Reserve, managing policy will become increasingly challenging. With a rising neutral rate, monetary easing will likely proceed cautiously. The Fed funds rate is forecasted to decline to 4% by 2025 and 3.5% by 2026, with upside risks.
Conclusion
Karsten Junius’ analysis highlights a resilient U.S. economy but with notable challenges ahead. Balancing economic growth, inflation, and monetary policy will remain critical in the coming years.
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