The United States economy ended 2024 on quite a solid note, with consumer spending continuing to drive growth in the country. Kavan Choksi points out that the economy’s output of goods and services expanded at a 2.3% annual rate from October through December. For the full year, the United States economy grew a healthy 2.8% in 2024. Barring an unforeseeable event, the economy may grow even better in 2025 than it did in 2023 and 2024.
Kavan Choksi briefly talks about United States economic growth driven by consumer spending
Sustained growth in an economy creates increased opportunities for wages and investment. Therefore, even the U.S. Chamber of Commerce is calling for a national priority for growth, which is driven by people through productivity and innovation, as well as fostered through sound public policy. The economic growth experienced in the United States in the last few years has been driven largely by consumer spending. Consumers fuelled this growth by making purchases from their wages, which has grown at a relatively faster rate than inflation since the middle of 2023. This enabled the consumers to spend above still-high inflation.
Consumers today earn strong wages as the United States has a worker shortage that pushes up wages, as businesses tend to compete to attract and retain workers. The ageing population in the country is also an important factor that contributes to the worker shortage. Older Americans are gradually aging out of the workforce and retiring. On the other hand, younger generations have comparatively fewer kids. Moreover, the labour force participation rate has been trending downward for more than two decades. Such trends are contributing to a shrinking workforce. The United States economy, in fact, is in an unprecedented situation where the number of job openings in the country is greater than the number of available workers in the economy. Before the Covid-19 pandemic, there mostly were more unemployed workers than job openings. However, that situation has flipped at the moment, and is likely to stay the same for the foreseeable future.
Kavan Choksi mentions that as long as businesses in the United States stay short of workers, jobs in the country will stay plentiful and pay well. This would invariably allow consumers to also spend more. This cycle would continue as long as the worker shortage remains.
Coming to 2025, the labour market conditions will be pivotal in causing the economy to grow as strongly as it has in the last couple of years. Inflation is also likely to continue to fall to the Fed’s 2% target rate, which would bring down interest rates. However, the key to faster economic growth is likely to be productivity gains.
Productivity in an economy refers to producing more goods and services with the same amount of labor and capital. Businesses can only continue hiring employees if those workers contribute to the profitability of the company. Improvements in worker productivity enable businesses to afford the higher wages that employees are earning. In the United States, wages have risen considerably, keeping pace with productivity gains. As a result, companies still find it worthwhile to hire and retain workers, even if profit margins remain tight.
