Many economists see positive trends in raw market data over recent months, but their optimism is tainted by consumer sentiment and the unknowns of the 2024 election cycle.
Predicting the future of the economy in an election year is like trying to forecast the weather in Michigan.
You can make an educated guess, but you never know exactly what will happen — like the Federal Reserve Board’s Sept. 18 half percentage point interest rate cut.
That rate cut will probably have more influence on the economy than the outcome of the presidential election (likely decided by the time you’re reading this).
“A president’s powers over the economy are limited,” wrote Mike Walden, professor emeritus at North Carolina State University, in the NC State CALS News, prior to the election. “While the economic ideas of a president are certainly important, the reality is it takes more than that one person — even a very powerful person — to move the economy. There are many, many hands on the oar of the economic ship.”
Yet, politics in general do influence the economy.
“From our perspective, the most likely outcome is that we’re going to have a divided government (one or the other house of Congress of a different party than the president),” says Gabriel Ehrlich, an economist at the University of Michigan in Ann Arbor. “Given that, I think we’re going to have a lot more of the same in terms of fiscal policy.”
Marc R. Schechter, CEO of Schechter Investment Advisors in Birmingham, says, “Politics will have an impact on the economy. If a party gets in that wants to invest in infrastructure, more jobs will be created. Conversely, if a party raises the corporate tax, that money has to come from somewhere, whether it’s higher prices or lower wages.”
The Fed’s September action — cutting the central bank’s benchmark rate by 50 basis points to a range of 4.75 percent to 5 percent — marked its first easing of monetary policy since 2020, and the termination of its most aggressive inflation-fighting campaign since the 1980s. And more are on the way. Fed officials say they foresee two more .25 basis-point cuts in 2024, followed by four more cuts in 2025, and two more in 2026.
Prompting the rate cut was a slowing labor market; 118,000 jobs were created in June, 89,000 were created in July, and 142,000 were added in August — all below the average monthly gain of 202,000 over the prior 12 months.
“The labor market is actually in solid condition,” Fed Chairman Jerome Powell said at a press conference following the meeting at which the rate was cut. “And our intention with our policy move today is to keep it there. You can say that about the whole economy. The U.S. economy is in good shape.”
Although the September Fed rate cut was surprising in its size, .50 basis points rather than .25 basis points, it wasn’t unexpected. In fact, most economists’ forecasts were based on the assumption that rate cuts were on the horizon.
Schechter says he looks at the forecasted Secured Overnight Financing Rate, or SOFR, when making long-range plans for his clients. SOFR is a broad measure of the cost of borrowing cash overnight, collateralized by Treasury securities.
“We were up around 5 percent in mid-September. We’re seeing a precipitous drop coming,” Schechter says. “By March of ’25, what’s now 5.2 percent is predicted to be 3.8 percent. The markets are predicting that this will happen, and it’s going to go down to 3 percent by August of ’26.
“I believe the economy will be strongly impacted positively by the reduction in interest rates. Lowering the interest rates helps the economy at every level, and in every sector of the economy.”
Glenn Stevens, vice president of the Detroit Regional Chamber, agrees. “If you look at the residents of the city and the region, (the rate cut) would bode well for everything, especially high-ticket items like mortgages and car loans.”
Politics aren’t the only wild cards in the game of economic forecasting. World events play a role, too.
“Activities in the Middle East will have a big impact on the cost of gas at the pump,” Schechter notes. “There is a fear that a larger war could break out and supplies of oil refineries get hit, and people can’t produce as much, and prices are going to go up.”
Benjamin Gielczyk, associate director and senior economist at the Michigan House Fiscal Agency, says, “The Russia-Ukraine and Israel-Hamas conflicts continue to present challenges on multiple fronts as countries respond politically, militarily, and economically.”
12-Month Percent Change, Consumer Price Index
(Gray areas represent a recession.)
Rate Cut Colors Forecasts
A short time after the rate cut, Goldman Sachs economists changed their prediction for third-quarter 2024 growth to 3 percent from 2.5 percent. The upgrade came amid strength in retail sales, industrial production, and housing starts.
Regardless of who triumphs in the election, and perhaps in reaction to the Fed action, economists in Michigan appear to be “cautiously optimistic” about the 2025 economy in the U.S., Michigan, and metro Detroit. The numbers appear to back up the optimism.
The Congressional Budget Office (CBO), in its latest forecast, says it expects the national economy to grow, but more slowly in 2025 than it grew in 2023. Economic growth is then projected to average roughly 1.8 percent a year from 2026 to 2034.
The Federal Reserve’s Open Market Committee projects the median real GDP to grow 2 percent in 2025 and 2026. The University of Michigan predicts real GDP growth at 2.4 percent in 2025 and 2026.
Ernst & Young’s forecast anticipates real GDP growth will moderate below 2 percent in the second half of 2024 on slower private sector activity, as the drag from inventories and international trade dissipate. It foresees average GDP growth around 2.4 percent in 2024 and 1.7 percent in 2025, and expects two Fed rate cuts of 25 basis points in 2024 and 125 bps of easing in 2025.
The CBO says it expects the rate of inflation to max out at 2 percent by 2026. The Federal Reserve anticipates inflation will be 2.3 percent in 2025 and 2 percent in 2026. U-M’s forecast indicates inflation will settle at 2.3 percent in 2026.
The Conference Board says it expects GDP growth to be lackluster in Q4 2024, expanding at a tepid pace of about 1 percent annualized. The slightly faster pace relative to Q3 reflects some expectation that falling mortgage rates might stoke modest increases in home sales, and a cheaper U.S. dollar supports slightly faster growth in exports.
Growth, however, should rise slightly above 2 percent by the end of 2025, reflecting the success of the Fed’s 2-percent inflation target, and lower interest rates.
Gielczyk wrote in May that “the national economy remains strong and has shown resiliency despite aggressive rate hikes by the Federal Reserve to mitigate inflationary pressures. Consumers continue to exhibit spending power, driving much of the GDP growth.”
Christopher Letts, senior vice president at the Pine Harbor Group at Morgan Stanley in Bloomfield Hills, notes the Fed must walk a tightrope to make sure the economy recovers from the post-pandemic spike in inflation.
The Detroit Regional Chamber says it expects inflation in the city of Detroit to hover around 2.5 percent annually from 2025 through 2029.
“Managing both inflation and growth will be key as the Fed works to stimulate the economy without overdoing it,” Letts says. “The economy will depend on how businesses manage profit expectations without resorting to major layoffs.
“The Fed sees less risk in lowering rates than in previous cycles, recognizing that pandemic-related factors were significant inflation-drivers. Ultimately, a smooth economic landing will depend on keeping the consumer strong and ensuring that borrowing costs come down for both households and businesses.”
Letts also cites the uncertainty of world events and other economic influences.
“Geopolitical tensions and surging capital expenditures, particularly in tech, are key trends to watch,” Letts says. “For example, the Magnificent Seven stocks, which previously accounted for just 5 percent of S&P 500 Capex, now represent 20 percent, driven by the massive capital demands of building AI infrastructure. I’m also keeping an eye on the resilience of the American consumer, especially given the historically consumer-high debt levels.”
The University of Michigan expects a slowdown in national economic growth in early 2025, but toward the end of the year activity will begin to rise.
National Debt Looms
The national economic picture always will be colored by the size of the nation’s debt, which stands at $35.33 trillion (as of Sept. 24).
“The national debt is on a steady march upwards, and it would take nearly $8 trillion of savings just to stabilize the debt over the next decade,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “It’s dangerous that we’ve let things get this bad, and we need to treat it like the priority that it is.
“The President’s call for over $3 trillion of deficit reduction is a welcome start, and he deserves credit for presenting a budget that pays for new initiatives and improves our fiscal situation, but the budget doesn’t go nearly far enough.”
Timothy G. Nash, director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University in Midland, says the national debt is “untenable.”
“According to the U.S. Treasury Department, the U.S. national debt increased from 30 percent of GDP in 1981 to over 123.2 percent of GDP today,” he says. “We’re experiencing an untenable trend that cannot continue. America in 2024 is almost as financially burdened as a percent of GDP as it was at the end of World War II.”
The bottom line is neither political party is willing to do what it takes — substantially cut government spending and raise taxes — to make a serious dent in the nation’s red ink.
“At the end of the day, the political will needs to be there to address it, and so far, it’s proven to be difficult,” U-M’s Ehrlich says. “You have to do unpopular things to solve problems, and there’s not a lot of urgency to do that.”
Growing Consumer Confidence
Post-pandemic inflation eroded consumer confidence and spending, but rebounded in 2023 and 2024. According to the CBO, which says consumer spending drove stronger-than-expected economic growth in late 2023 and early 2024, the growth of consumer spending is projected to moderate over the next three years because of tight credit conditions and weaker growth of wages. The growth rate of real consumer spending is projected to fall from 2.7 percent in 2023 to 1.3 percent in 2026.
“The fact (the Fed) signaled another cut this year, four next year, and two in 2026, that’s a pretty good path to really curb the inflationary forces that we’ve seen, while enabling buying power for the consumer,” Stevens says. “That’s cause for optimism.”
The Conference Board Consumer Confidence Survey, on the other hand, suggests continued concerns among consumers about the future, portending further weakness in spending for the balance of 2024. Consumer spending may pick back up in 2025, as lower interest rates and inflation will grant consumers relief.
Real consumer spending growth, according to the Conference Board, is still hovering slightly above real disposable personal income growth, meaning some households continue to finance purchases with debt, as excess savings have disappeared. Consumer credit and debt service payments are mounting, as well — which, combined with the high cost of living and elevated interest rates, also may curb expenditures on discretionary items.
In turn, auto loan and credit card delinquencies are above pre-pandemic levels, and banks are suffering increasing losses on unpaid consumer debt, the survey indicates.
Michigan Perspective
Closer to home, U-M’s most recent state forecast says cracks have started to show in the foundation of Michigan’s previously vigorous economic recovery from the COVID-19 pandemic and subsequent expansion.
The Michigan House Fiscal Agency forecasts the state’s wage and salary employment to increase by .9 percent in 2025, and .3 percent in 2026. The agency predicts Michigan’s personal income will increase 4.1 percent in 2025, and 3 percent in 2026.
Inflation (as measured by the Detroit Consumer Price Index) is forecast to increase 2.2 percent in 2025, and 2.3 percent in 2026. HFA says it expects the state’s unemployment rate to peak at 4.2 percent in 2025 and slide back to 4.1 percent in 2026.
“We continue to believe that clear progress on disinflation will allow the Federal Reserve to pivot to interest rate cuts in time to prevent a recession, although we project a period of slower national growth ahead,” Ehrlich says. “Our forecast for Michigan’s economy follows those same contours, with job growth slowing substantially, yet staying in positive territory on an annual basis through 2026.”
Stevens says, “We’ve seen a softening of the labor market recently in Michigan, but not much. Generally speaking, our economy has been pretty strong here in Michigan.”
Stevens says he looks at the labor participation rate (which tracks the total job pool), rather than the unemployment rate (which counts people seeking employment), to get a more accurate view of how many people in the region are working.
“The labor force participation rate has upticked in the past nine months,” he says. “In August, it was 62.3 percent, and a year ago it was 62.2 percent. During the pandemic, it was 56.6 percent.”
Stevens adds that the Fed’s cut of the interest rate should help Michigan’s economy.
“We’re a large manufacturing state,” he says. “We’re a large automotive state. The vehicle sales have been relatively strong, but (high) interest rates have hurt that. There have been production cutbacks with some of the manufacturing plants, so that hurts the populus and the pocketbook. With interest rates coming down, hopefully it will give a little shot to the new-vehicle market.”
U-M’s Ehrlich agrees lowering interest rates will benefit Michigan as much as any other state.
“Michigan’s economy is a little more rate-sensitive because of the auto industry,” he says adding, “Michigan has two of the biggest mortgage companies (Rocket Mortgage and UWM) in the country, and they’re impacted by higher interest rates.
“We’re projecting job losses in the second half of this year,” Ehrlich says. “The auto industry is something that we’re watching. We do expect moderate growth in 2025 and 2026.”
According to Ehrlich, one of the reasons U-M is predicting growth in 2025 and 2026 is the expected expansion of non-cyclical industries like government, health services, education, leisure, and hospitality.
“We expect those industries to keep growing. They have some momentum, and we expect them to cushion Michigan’s labor market.”
Pine Harbor Group’s Letts says he expects the state to see moderate growth, “driven largely by our state’s leadership in the electric vehicle sector. Although 92 percent of U.S. vehicle sales still involve ICE (internal combustion engine) vehicles, Michigan is leading the charge with investments in EV infrastructure, battery technology, and supply chain innovation, all of which are driving job creation.”
Detroit’s Delay
According to U-M, metro Detroit, and specifically the city of Detroit, is lagging behind the national and state economies. Detroit’s economic recovery continued through late 2023 and early 2024, despite challenges such as high interest rates and last year’s strikes at Blue Cross Blue Shield of Michigan, the Detroit Three automakers, and the three Detroit casinos.
The university estimates that the count of payroll jobs located within Detroit’s boundaries recovered from the COVID-19 pandemic in the second quarter of 2024, roughly one year after the count of employed Detroit residents did so.
Detroit’s unemployment rate, U-M says, will tick up to 7.6 percent in 2025, before falling to 6.9 percent by 2028–29.
Wage gains at Detroit payroll jobs and among city residents have been lagging behind local inflation recently, according to the U-M forecast, but that trend is expected to reverse course in the years ahead.
“We do expect growth to continue in Detroit,” says Ehrlich, who also is one of the directors of the EmeritiCity of Detroit University Economic Analysis Partnership. “We’re expecting a moderate 1.3 percent growth in payroll employment over the next three years, which is good to see.”
Stevens, who also is director of the Detroit Regional Chamber’s MichAuto initiative, indicates the U.S. auto industry expects to produce around 15.1 million units in 2024. “We hope to see a number closer to 16 million next year because of these rate cuts,” he says. “We’re optimistic about the number going up next year, which bodes well for Detroit, the region, and Michigan.”
He adds the Consumer Price Index in Detroit is up 3.5 percent in 2024, compared to about 2.5 percent in the rest of the country.
The fact (the Fed) signaled another cut this year, four next year, and two in 2026, that’s a pretty good path to really curb the inflationary forces that we’ve seen…”— glenn stevens
“That’s significantly higher than most places in the country,” Stevens says. “The cost of purchasing goods is huge. People have felt inflationary pressure. That’s been a headwind, and the ability to knock that back will help the consumer in Detroit.”
Letts says he’s “cautiously optimistic” about the economic prospects for metro Detroit over the next 12 months.
“While Detroit’s identity is still tied to the auto industry, recent investments in tech, health care, and mobility are positioning our city for meaningful long-term growth. Detroit is capitalizing on its strengths in advanced manufacturing, particularly in EVs and autonomous vehicle technologies.”
He maintains, however, that regional challenges like housing affordability, population density, and transportation infrastructure need to be addressed to sustain the momentum.
The Michigan House Fiscal Agency anticipates the state personal income to increase by 4.1 percent in 2025 and 0.3 percent in 2026.
Conclusion
To get the big picture of a weather forecast, meteorologists use images from space. Economists, meanwhile, utilize data, trends, and history as their guide.
For that big picture of the economy, ask an objective, outside observer.
“GDP growth will remain a little lackluster this year, but as the shift in monetary policy begins to boost rate-sensitive spending, growth should reaccelerate in 2025 and beyond,” says Paul Ashworth, chief U.S. economist for Capital Economics in London. “The presidential election adds to the uncertainty.”
Other forecasters are able to look out the proverbial window, like the more-local Gielczyk, of the Michigan House Fiscal Agency, who says, “By historical standards, the Michigan economy is forecast to remain relatively strong.”
