MHI Solutions Improving Supply Chain Performance
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The 2025 economic outlook is a mix of potential and pitfalls. On the upside, inflation is likely to cool further this year, while the labor market is poised to remain relatively solid, positive GDP growth continues and interest rates fall. However, geopolitical tensions and fiscal policy uncertainties loom large in the wake of the 2024 U.S. elections, presenting major downside risks and pitfalls to an outlook that might otherwise seem rosy.
Inflation is Likely to Cool Further
After several years of soaring inflation, driven largely by supply chain disruptions and heightened demand during the post‑COVID recovery, consumer inflation rates only began easing seriously in 2024. While year‑on‑year inflation rates have remained elevated, further declines are likely this year as long as geopolitical risks remain somewhat muted. In fact, we expect most of the major U.S. year‑on‑year consumer inflation rates—total CPI, core CPI, total PCE and core PCE—to fall toward the Federal Reserve’s target of around 2% this year. That is our base case scenario.
Easing inflationary pressures in our base case scenario are likely to clear the way for the Fed to cut interest rates further, weighing on the greenback and supporting business investment, business valuations, real estate prices and exports. Most importantly, interest rate cuts and a weaker dollar would present upside opportunities for material handling business activity, new orders and exports. The pace of Fed interest rate cuts is uncertain and highly dependent on inflation and labor market data. So, what could happen with interest rates this year? In sum, 2025 interest rate cuts could conceivably total or exceed 100 basis points. The pace and size of Fed interest rate cuts will depend greatly on geopolitical tensions.
There is also the potential that inflation could rebound. For example, if global supply chains suffer from additional trade restrictions or are impacted by kinetic conflict, inflationary pressures could cease easing, and prices across manufactured goods categories could bubble up quickly. Inflationary risks would be particularly acute if key global shipping lanes and oil production remain under threat of disruption or destruction.
U.S. Labor Market Supports Growth Tailwinds
The labor market is likely to be supportive of growth in 2025. Going into 2024, we expected payroll gains to slow and the unemployment rate to rise because we expected that the number of new market entrants would exceed the number of new people added to payrolls. That is pretty much the exact scenario that played out this year.
Around 70% of U.S. GDP comes from consumption, which is why the labor market is a top factor driving economic activity and growth. As we consider the potential for the U.S. economy in 2025, some tailwinds could support growth this year, although the pace of job gains slowed last year—and it could remain a bit slower or slow further this year.
In considering the whole year ahead, we expect payroll levels to show modest gains, but we also expect additional modest increases in the unemployment rate on‑trend. Moreover, jobs for knowledge workers may remain scarce while the demand remains high for workers in physically demanding in‑person roles, including manufacturing, construction, healthcare, education, agriculture and transportation. Competition for labor in these sectors is likely to result in a continued rise in wages and persistently high levels of labor leverage. For material handling businesses, rising labor costs present downside risks to profit margins.
Geopolitical Risks are Major Pitfalls for Growth
Cold War Two is unlikely to end soon, and the conflict system could expand further and become more severe in 2025. With geopolitical tensions likely to be elevated, ongoing military conflicts, trade disputes and political instability in various regions present significant risks to global economic stability and supply chain security. These factors could negatively impact investor confidence, supply chains and energy prices, creating compounding risk factors that could diminish aggregate U.S. economic output.
For material handling companies and other manufacturers reliant on global suppliers, there are significant risks posed by the threat of greater tariffs, sanctions or even blockades. Geopolitical risks don’t just present downside risks to growth. These risks could also be inflationary, driving up costs while also presenting a significant threat to material handling profit margins.