Newswise — INDIANAPOLIS — Following a year marked by stronger than expected output and improvement in tackling inflation, the U.S. economy will reach its equilibrium growth rate in 2025 and supply and demand will finally come back into balance after taking major hits during the COVID-19 pandemic, according to an economic forecast from the Indiana University Kelley School of Business.
“Our economic outlook for the national economy during the next year is fairly middle of the road and what could be best described as a ‘balanced on trend’ growth path,” said Kyle Anderson, clinical assistant professor of business economics and assistant dean for academic programs at Indianapolis.
“We expect growth in output and employment to decrease slightly relative to its recent past, and that inflation will continue to come down over the near term,” Anderson said. “In each of these cases, these projections, if borne out, will reflect an economy moving toward its sustainable path of growth.”
A year ago, the panel was relatively optimistic and predicted real gross domestic product close to 2% for much of this year. As it turns out, actual growth in output over the past four quarters has averaged 2.6% and has been driven primarily by robust consumer spending.
The Kelley School forecast projects that national output growth will remain solid, although it will slow down during the first half of the year, as the Federal Reserve meets its disinflation goals, growing at 2% in 2025. Inflationary pressures are expected to continue to ease, with core inflation nearing 2.3% in 2025.
“After what has been three consecutive years of national outlooks that have had their projections heavily influenced by the course and recovery of the pandemic, this year’s outlook is noticeably more typical,” said R. Andrew Butters, associate professor of business economics and public policy and author of the U.S. forecast.
“This at least partly reflects that between growth, the labor market and inflation, we have entered what would be considerably more normal,” Butters said. “At this point, many of the shocks initiated by the pandemic have receded or become noticeably entrenched into the economy that businesses and households are regularly factoring them into their decisions.”
The Kelley School presented its Futurecast 2025 today at the Indianapolis Artsgarden.
The outlook for Indiana is similar to that of the nation. Employment and income show acceptable growth, although slightly below the national rate, due to Federal Reserve efforts to bring down inflation. Income growth holds up relatively well. The state’s real GDP growth is expected to be 2.1% this year and 2.9% in 2025.
“We expect a slowdown in employment growth, matching that in the pre-pandemic period,” said Carol Rogers, director of the Indiana Business Research Center. “Income growth slows slightly during the middle half of our forecast, but then stabilizes. Both employment and income fall short of what we expect at the national level.”
The state’s labor market is loosening, with Indiana projected to maintain a rate of unemployment under 5% and tracking the U.S. rate closely. Construction growth will remain strong, as it was before, during and just after the pandemic.
The news is particularly good for the city of Indianapolis and surrounding counties. The forecast projects real GDP growth of 2.3% this year and 3.1% in 2025.
“Several factors contribute to a resurgent Indianapolis economy,” said Phil Powell, executive director of the Indiana Business Research Center and clinical associate professor of business economics and public policy. “A national rebound in durable goods purchases sparked by a decline in interest rates disproportionately benefits a manufacturing-intensive industry base.”
Powell also pointed to more than $9 billion being invested in new capital improvement projects downtown, which support the city’s surge in convention and major events business, which this week will include a three-night run of concerts by Taylor Swift, bringing in an estimated $100 million to the local economy. The city will attract more than 550 signature events this year, a trend that is expected to continue.
In 2023 and 2024 stocks performed much better than expected, but with valuations at relatively high levels, a repeat of outperforming historical averages is unlikely, said Russell Rhoads, clinical associate professor of financial management at Kelley Indianapolis.
“We expect, at best, stocks to underperform with the possibility of negative returns for stocks in 2025,” Rhoads said. “With stocks priced for a perfect soft-landing and recovery, we believe 2025 may be a year of below average stock performance.”
Risks to the U.S. forecast include federal deficits and geopolitical risks abroad, such as the conflict in the Middle East and in Ukraine. Also of concern is how the next administration handles trade policy and if the labor market continues to approach being in balance, as forecast.
Other key points from the Futurecast:
- The unemployment rate is expected to increase in the first half of 2025, but stay below 5%. Employment growth is expected remain near 1% over the next
- Global output is expected to grow at 3.2% in 2025. Inflationary pressures experienced globally — projected at 4.3% for 2025 — are expected to continue to ease and for monetary policy broadly to take a more accommodative posture over the near term.
- Advanced economies are expected to grow at 1.8% in 2025, while emerging market and developing economies are expected to grow at 4.2% in 2025.
- Financial market pricing is expecting the Fed Funds target rate to settle in around 3.5% at the end of 2025, which will also coincide with the lowest expected level for this cutting cycle. The Kelley forecast expects the Fed Funds rate to approach 3% over the same period.
Kelley faculty will present their forecast in 10 other cities around the state. They will be joined by local panelists from other IU campuses and other universities, offering perspectives on the global, national, state and local economies, as well as the financial markets. The tour is sponsored by the Kelley School of Business and its Indiana Business Research Center, the IU Alumni Association, IU campuses and numerous community organizations.
“The annual Futurecast has a profound regional impact, providing business leaders and policymakers with critical insights into market trends and economic conditions,” said Julie Manning Magid, vice dean of Kelley Indianapolis and executive and academic director of the Randall L. Tobias Center for Leadership Excellence. “It helps guide decision-making and reinforces our commitment to fostering economic growth and resilience in Indianapolis and throughout the state.”
The starting point for the forecast is an econometric model of the United States, developed by IU’s Center for Econometric Model Research, which analyzes numerous statistics to develop a national forecast for the coming year. A similar econometric model of Indiana provides a corresponding forecast for the state economy based on the national forecast plus data specific to Indiana.
A detailed report on the outlook for 2025 will be published in the winter issue of the Indiana Business Review, available online in December. In addition to predictions about the nation, state and Indianapolis, it also will include forecasts for other Indiana cities and key economic sectors.
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