As we settle into 2025, I have to say I am getting a little worried about the economy. We did end up with a healthy GDP (or gross domestic product) growth rate in the fourth quater of of 2.5%, but I have recently revised my GDP forecasts lower for 2025 to 1.9% and for 2026 to 1.8%. Most economic forecasts have been higher (2.3% for 2025), although I think those too will be revised downwards.
My forecasts are informed by key leading indicators that are flashing orange, notably the University of Michigan Consumer Sentiment Survey and the NFIB Small Business Survey. While the NFIB survey saw a post-election bump at the end of 2024, as is typical after any election regardless of the party that wins, it dipped again in January. Producer inflation remains the top concern among businesses, with 22% planning to pass on those higher costs to consumers and likely raising prices in the near term — a signal that consumer price index (CPI) stickiness will likely persist. Moreover, while only 15% of businesses plan to create new jobs, 33% increased compensation in January, reinforcing the notion that wage inflation remains in play.
The University of Michigan Consumer Sentiment index fell from 71.7 in January to 64.7 in February. Given that consumption makes up two-thirds of the U.S. economy, this is a significant red flag. A closer look at the survey results reveals a 19% plunge in buying conditions for durable goods, primarily due to concerns about tariff-induced price hikes. Expectations for personal finances dropped by 10%, and the long-term economic outlook declined by 6%. It was primarily Democrats and independents (the bulk of all voters when you combine them) who drove these declines.
In addition, year-ahead inflation expectations jumped to 4.3% in February’s survey (up from 3.3%). This is also concerning because if workers think inflation is going to get worse, they expect higher wage increases (which, in turn, fuels inflation). Yes, that is a circuitous negative loop, but that’s exactly why monetary policy decision makers try to avoid unstable and higher-than-normal inflation.
A similar consumer confidence metric by the Conference Board also declined notably (down 7 points) in February, the largest drop since 2021. The economic expectations index decreased more so (down 9.3 points). This survey focuses a bit more on labor conditions (e.g., how hard or easy it is to find a job). It’s interesting that this metric fell, and although there are various factors behind this, DOGE cuts to the federal workforce have raised fears even among non-federal employees. If we eliminated all federal workers (minus military-related), we would cut overall government spending by just 2%. And given the roughly 36% we spend on Social Security and Medicare (with those demographic expenditures only increasing in coming years), the only way I see out of the deficit is to grow the revenue side of the ledger primarily through increasing the (worker) tax base through more workforce participation.
Regarding the labor market, the unemployment rate rose from 3.8% in December to 4.4% in January not seasonally adjusted, although the seasonally adjusted rate barely changed. In my forecasts, I do have unemployment rising a bit this year to 4.4% in 2025 and 4.3% in 2026. While this marks an uptick from recent lows, it is nowhere near the levels seen during the Great Recession (when the baby boomers were still in their prime working ages). The most recent U.S. job openings showed a drop to 7.6 million in December, down 3.8% month-over-month and 14.5% year-over-year. We are off the pandemic highs (in terms of job openings), but they are pretty much in line with pre-pandemic hiring.
Layoffs are also stable and actually slightly below pre-pandemic levels. Having said all this, I do see some elevation in layoffs simply due to the increasingly pessimistic consumer, which will spill over to business revenues.
I am also carefully watching our Colorado Springs number of new jobs. Third-quarter data for 2024 was released and showed only 1,874 new jobs year-over-year. Our region has been meeting or exceeding the number of new jobs needed to match population growth (5,600) since 2013, but with the data available thus far, it’s looking like 2024 may have had significantly lower job growth. There have been some employment data issues across the state, but we now have two quarters that are showing much-lower-than-usual job growth in our region, which is why I am paying close attention to this metric.
El Paso County wages slightly deteriorated in the third quarter of last year with local wages 9.8% lower than the U.S. (compared to 9.2% lower in the second quarter) and 15.3% lower than Colorado (compared to 15.1% lower). I mentioned in a recent presentation for the Southern Colorado Apartment Association that I am frustrated by this persistent wage gap. While I do think the retired military (who have pensions and may be willing to work for less) and military spouses (who move frequently, making wage increases over time more difficult) are an issue, I no longer think that is the driving force. I focus on wages (as opposed to income, which includes other sources of earnings like rental income if someone owns a property, Social Security/other retirement payments, etc..) because from a workforce attraction perspective, wages are what people focus upon when deciding to move here or stay here. In the past, our housing costs were below the U.S. median price, and our lower cost of living somewhat justified the lower wages. But now our housing costs are above the U.S. median by 14 percentage points, and I worry about (especially young) people deciding not to move here because the wages don’t align with housing costs.
In that vein, the MIT Living Wage Calculator for 2024-25 data was released and not surprisingly, the living wage in our region increased. The table has various categories you can look up, but as one household example, the living wage for a family with one working adult and two children went from $116,584 last year (required to meet basic expenses) to $121,638 this year.
And the latest national inflation data certainly helps explain the increased living wage. The U.S. Consumer Price Index rose 0.5% from December to January, compared to 0.4% in the prior month. Excluding food and energy, core inflation was up 0.4%, versus 0.2% previously. Year-over-year, inflation stood at 3.0% in January (compared to 2.9% in December), with core inflation at 3.3% (up from 3.2%). One of my major concerns is that this creeping inflation does not yet account for potential tariff-induced inflation.
Interest rates were not changed at the last Fed meeting in January, with the Fed Funds rate staying in the 4.25% – 4.50% range. Despite that, the 30-year mortgage rate increased in January from 6.72% to 6.96%,due primarily to higher inflation expectations. Lenders adjust mortgage rates to account for inflation expectations because if prices are higher in the long term, they have to demand higher interest rates to compensate.
The Colorado Springs cost of living index for all of 2024 was 101.9%, indicating a slight premium over the national average (of 100). Recently, I’ve been having conversations regarding our regional cost of living versus Huntsville, Ala., due to the likely (yet again) relocation of Space Command. It is interesting that in 2021, our region’s cost of living was quite elevated at 107.8, but is now down to 101.9%. This is primarily due to the sudden spike in housing costs during the pandemic, although I believe the rest of the U.S. has now largely “caught up” in terms of housing inflation, which explains the decline.
Home sales in the Pikes Peak region declined from 877 in December to 696 in January, while the median price of existing single-family homes in Colorado Springs rose just 1.0% year-over-year — much lower than the U.S. average of 4.8%, a welcome statistic! In the fourth quarter, Denver saw a slight 0.2% decline in home prices. Despite this leveling of prices at the end of 2024, Colorado Springs worsened in the affordability rankings from 48th most expensive in the second quarter to 47th most expensive in the third quarter out of roughly 190 measured MSAs.
One affordability metric, the Cost of Housing Index, stayed roughly the same in the fourth quarter at 38%. This metric gives the proportion of pre-tax income needed for mortgage payments. This isn’t my favorite metric, but it does seem to tell the story that on average, households are spending significantly more than the “benchmark” of roughly 30% of income on housing. The U.S. average stood at 37% in the fourth quarter.
In sum, while employment levels remain relatively stable, consumer sentiment and inflation expectations present growing concerns. Businesses are growing increasingly cautious as a result. Regardless of whether households and businesses agree or disagree with the current policy changes, there is undoubtedly a negative impact created by the overall economic uncertainty these policies may have in the near and long term. Often, perceptions become reality, and if the general perception is that prices will further increase, that typical household income may erode and jobs may become scarcer, consumers and businesses will act accordingly. My hope is that the uncertain environment abates quickly, so we can continue as the (global) standout post-pandemic, which most have hailed as a “remarkably resilient U.S. economy.”