Steady Economic Growth Expected as Inflation and Market Risks Remain
The U.S. economy is expected to continue growing at a moderate pace, with low unemployment and strong business investment supporting the expansion. The forecast calls for real economic growth of 2.6%, helped by steady household spending and continued investment by companies.
Construction activity may also improve after a period of slower growth in residential and commercial building. Delayed demand could lead to a stronger recovery in real estate projects during the second half of the coming year.
Growth Comes With Several Risks
The economic outlook is generally positive, but several issues could slow progress. Inflation, high interest rates, energy costs, stock prices and federal finances all create uncertainty.
Economic growth reached an annual rate of 3.4% in the third quarter, showing that the economy has strong momentum. Business investment has been especially important. Real business investment increased at an annual rate of 19.4% during the quarter.
Investment in new intellectual property, including software and computer chip designs, rose at an annual rate of 20.9%. Spending on equipment, including data centers and energy systems, grew at an annual rate of 8.4%.
Artificial intelligence has played a major role in this investment. Companies continue to spend heavily on technology, computing systems and energy infrastructure needed to support new artificial intelligence tools. However, concerns remain that some artificial intelligence-related stocks may be priced higher than their true value.
Inflation May Stay Above the Central Bank’s Goal
Inflation, measured by a broad consumer spending price index, stood at 2.1% during the third quarter. It is expected to remain between 2% and 3% in the coming year.
Energy prices are a major reason inflation may remain high. Conflicts in the Middle East and restrictions linked to Russia have limited oil production and added pressure to energy markets. Tariffs have also raised production costs for some businesses.
Higher fuel prices affect more than drivers. When gasoline and other energy costs rise, companies often pay more to make and ship products. Those higher costs can then appear in the prices paid by consumers.
The central bank is working toward inflation below 2%. Because inflation remains above that goal, short-term interest rates are expected to stay near their current level instead of falling during the coming year.
Labor Market Could Tighten Further
Unemployment has remained above 4% for much of the period covered by the forecast. However, it is expected to fall below that level as the labor market becomes tighter.
Limits on immigration are expected to keep the size of the labor force mostly flat. At the same time, businesses continue to need skilled workers, especially employees who can help expand artificial intelligence projects and other technology programs.
A smaller supply of available workers may make it harder for companies to fill open positions. It could also support higher wages for people who remain employed.
Indiana Growth Has Lagged the Nation
Economic activity in Indiana grew by 1.2% between the second quarter of one period and the second quarter of the next. That was below the national growth rate of 2.2%.
The weaker result was partly tied to a shrinking labor force. The labor force declined by 0.5% both nationally and in Indiana. Nonfarm employment fell 0.4% in Indiana while it increased 0.2% across the country.
Even with fewer workers, Indiana recorded stronger wage growth. Average hourly earnings in the state increased by 3.9%, compared with 3.1% nationwide. Indiana’s unemployment rate also improved from 3.8% to 3.6% and remained below the national level.
Several higher-paying industries added jobs in the state. These included:
- Heavy and civil engineering construction, up 8.1%
- Specialty trade contractors, up 3.1%
- Nondurable goods manufacturing, up 1.7%
- Management of companies and enterprises, up 1.7%
- Finance and insurance, up 0.5%
Indiana Outlook Is Stronger
Indiana’s real economic activity is expected to grow by 2.8%. The strongest gains are expected in construction, durable goods manufacturing, nondurable goods manufacturing, and professional and business services.
- Construction is expected to grow by 4.6%
- Durable goods manufacturing may increase by 5.6%
- Nondurable goods manufacturing could rise by 3.6%
- Professional and business services may grow by 3.0%
Life science companies are expected to remain an important part of the state economy. A state program includes $1 billion in tax credits to support life science development.
After shrinking during the previous period, Indiana’s labor supply is expected to grow. Employment may increase by 0.5%, while the labor force could rise by 0.2%. The state unemployment rate is projected to fall to 3.1%.
Markets and Global Growth
Investors may see modest gains as company earnings remain strong but interest rates stay elevated. A typical diversified investment portfolio could produce total returns between 4.3% and 10.8%, depending on its mix of investments.
The global economy is expected to remain resilient despite wars, energy concerns and other disruptions. World economic growth is projected at 3.4%, up from a current rate of 3.1%. Global inflation may rise to 4.7% before easing to 4.1%.
The Indianapolis metropolitan area could grow by 3%, supported by continued investment in life science industries. Unemployment in the area may fall as low as 2.5% if the nation avoids a major economic shock.