Related Links

• How Did the U.S. Elections Impact Firms' Outlook for the Economy?
• Firms' Employment and Wage Outlook Going Into 2025
• Fifth District Firms Are Optimistic Going Into 2025

Transcript

Tim Sablik: My guests today are Renee Haltom and Sonya Waddell. Renee is a regional executive and vice president, and Sonya is a vice president, both at the Richmond Fed. Renee and Sonya, welcome back to the show.

Renee Haltom: Thanks, Tim. This is a great way to end the workday.

Sonya Waddell: Yeah, thanks for having us, Tim.

Sablik: Well, on the topic of great ways to end the workday, our conversation today is going to be pretty simple — just talking about the economic outlook for 2025.

Before we get started, I'll note that we're recording this on February 6, as economic conditions and outlooks can change fast.

Regular listeners will know that the Richmond Fed gathers a lot of information from business leaders across our district, which includes Maryland, Washington, D.C., most of West Virginia, Virginia, North Carolina, and South Carolina. We collect that information through surveys, which is something Sonya's team works on, and through direct outreach, which Renee and the other regional executives do. So, I'm definitely excited to have both of you here with me today to pick your brains about everything you've been hearing from businesses about their expectations for 2025.

Let's start with how firms are feeling about their own prospects for the new year. Sonya, what are our surveys telling us?

Waddell: We run two surveys that can give us insight into this question, Tim. The first is the CFO Survey, which is a national quarterly survey of business leaders that we run with the Federal Reserve Bank of Atlanta and Duke's Fuqua School. The second set of information comes from our monthly business surveys. Those are regional. They're surveys of service providers and manufacturers that span our region's states and industries.

Let me start with the CFO Survey. The fourth quarter CFO Survey, which was fielded from Oct. 21 to Nov. 19 — of course, it's important to know what the timing of that survey was — showed not only an increase in respondents' optimism about their own firm prospects but continued strong expectations for revenue and employment growth in 2025.

The election made a difference. Optimism about their own firm prospects was somewhat higher in the post-presidential election sample than in our pre-election sample. It seems as though firms were buoyed by the election result. It's worth noting, though, that there was little change in employment or revenue expectations pre-election to post-election. Those expectations have remained steady and pretty strong for over a year and were pretty unchanged by the election.

In our regional business surveys, we asked firms about their optimism at about the same time in each of the last three years. Respondents were decidedly more optimistic about 2025 than they were about 2024 or 2023. Although activity still seems somewhat flat — particularly in manufacturing — firms that were optimistic in December were more likely to report growth in January for indicators like employment, sales, and new orders. I'll add that firms expressed the hope that the election would bring an easier regulatory environment that could boost activity.

Sablik: Renee, does this match what you're hearing from your contacts, and have your conversations shed any more light on why firms might be feeling more optimistic this year?

Haltom: The overall sense of optimism really resonates with what we've been hearing from businesses. When you ask businesses about the source of their optimism, it really is about the expectation of an overall friendly business environment more than it is any one policy that they expect to be beneficial. In fact, when you press them on specific policies, it's pretty hard to pin businesses down on any, which I think makes sense given the wide range of policies discussed during the election cycle. Whether firms feel good about their own prospects really differ sector by sector.

Sablik: Sonya, you also survey businesses about what they think about the overall U.S. economy. What did they have to say about their outlook for the U.S. economy as a whole?

Waddell: I think this connects to what Renee was saying she's been hearing on the ground.

Remember how I said the CFO Survey respondents reported an improvement in how they were feeling about their own firm's prospects? Well, optimism about the economy jumped even more in the fourth quarter. Here, the election made a big difference. The randomly selected firms that responded before the election had an optimism index that was in line with the steady increase we've seen since June 2022. But the firms that responded after the election had a much higher level of optimism about the U.S. economy, the likes of which we've not seen since the summer of 2021.

Of course, once again, it's important to recognize that the optimism did not necessarily translate into considerably higher expectations for GDP growth. On average, firms anticipated 2.3 percent GDP growth in the next four quarters, above the 1.9 percent that they expected in the third quarter, but not as big of a jump as you might think based on the sizable increase in optimism.

On the whole, expectations for GDP growth have improved steadily since the middle of 2022. For years, many firms that we were surveying were anticipating a recession which, as we know, never came. Firms are putting less and less weight on the probability of imminent recession.

A similar dynamic played out in the regional surveys. Optimism about the economy as a whole increased notably, but it was less correlated with reports of actual or expected growth in important business indicators such as revenue, shipments, or employment.

Own-firm optimism tends to be above whole-economy optimism, generally, in surveys. It also seems to be more indicative of how the firm will do in the near future, at least by their own reports.

Sablik: Renee, how does that compare to what you've been hearing?

Haltom: I'll put a different spin on the question. The real question is whether optimism firms are feeling translates to actual economic activity like increased investment or hiring. I'm hearing two different camps, and this is at the risk of over generalizing.

The first camp is the firms acting on this optimism. Those are generally ones that have a good idea of how certain policies they expect would positively affect them. Maybe it's related to tariffs, and maybe they're in certain commodities or sectors that would benefit from supply chains relocating to the United States.

But that's a relatively small camp. The second camp is much bigger. Those are firms for whom, when it comes to the different policies being explored now, the details really matter and we just don't have a lot of those details yet. In a lot of cases, firms are planning around different possibilities, for the most part waiting until there's certainty.

In fact, when you ask firms how they're preparing for the policy environment, many of them are actually being a tad more cautious on spending at the moment. Maybe they feel they've gotten lax on managing costs, or maybe they perceive less ability to pass on prices, or maybe they're just waiting for the uncertainty to resolve. In some cases, we also hear that uncertainty is slowing down some business decisions. So, a question I have is whether that will lead to a bump in activity down the road when uncertainty resolves.

Sablik: On the point on costs and passing on prices, certainly at the Fed inflation is always a core concern. Have businesses shared anything about how they're thinking about price changes in 2025?

Haltom: Inflation is, of course, the top question we're asking our business contacts.

It's really interesting doing business outreach ... You first have to ask a whole lot of other questions to understand the dynamics of their business, their pricing models, and whether there are unique trends affecting their business or their sector so you can decide the extent to which their answers actually have implications for overall inflation. So, collecting and interpreting anecdotes definitely has both art and science. But I digress on that.

Overall, most firms don't see a major resurgence in inflationary pressure based on what they know today. Most businesses report that customers are darn tired of inflation and are firmly pushing back on new price increases.

But to be clear, in many cases, price growth is still above pre-COVID norms. I think that's why we're still seeing inflation hover above 2 percent. In a lot of cases, that is simply because input cost growth is also elevated or still feels elevated to businesses.

A couple of the firms that I mentioned who are feeling more optimistic now did try to get away with new price increases in recent months. A couple of them were successful, but I wouldn't say that that's widespread.

Waddell: Our surveys are broadly consistent with what Renee was saying about businesses and price changes.

We've looked at prices in two different ways. Most commonly, we ask firms for changes or expected changes in the prices that they pay for their inputs or supplies, and then what they charge their customers.

As we know, firms saw considerable price increases in 2021 and 2022, first among manufacturers and then among service providers. Those price increases were both in the prices that firms were paying for their inputs and then what they turned around and charged for their products or services.

For manufacturers, that price growth has come back down to what would be considered normal ... in line with the price growth that we saw in the series historically. But for service providers in our surveys, it's not nearly as high as it was in 2021 or 2022, but that price growth remains above what we saw in, say, 2019 or earlier.

So far, expectations for 2025 haven't moved much. For example, in January, respondents outside of manufacturing — so non-manufacturing services and construction — expected growth in prices received to be about 3 percent for the next 12 months, compared to a historical average that was much closer to 2 percent. But this was also well below the peak of close to 6 percent expected in the spring of 2022.

We've also been asking firms if they expect price growth to be at, above or below what they would consider normal. A lot of them are still expecting price growth to be above normal.

The second way that we've been gauging price expectations is trying to understand what firms think about aggregate price growth. That's through a quarterly survey of inflation expectations. There, too, the average firm anticipates inflation will come down, but their expectations are still a little elevated compared to what they might have been prior to the pandemic.

Interestingly, firms also report following aggregate inflation measures, such as the Consumer Price Index or the Personal Consumption Expenditure Price Index, more closely than they did pre-pandemic.

Sablik: Another of the major economic stories coming out of the pandemic recovery was what was happening in the labor market. What are you both hearing from firms about their hiring and firing plans for 2025? Renee, why don't you go first?

Haltom: The labor market has normalized a lot. By that, I mean the days where firms could neither attract nor retain people are clearly over.

It wasn't uncommon to hear in, say, 2022 that if a worker wanted to take a vacation, they'd just quit and find a new job when they returned, which is obviously a very costly way to run a business and not ideal from the business' standpoint. Now, businesses feel there's a lot more balance. And let me tell you, the relief they feel is palpable. Firms feel an increased ability to attract workers, to retain the workers they want. Importantly, they feel an increased ability to manage their workforce properly, meaning to manage out workers that aren't productive or to make other needed changes to operations without fearing that workers are going to leave.

For a minute there in late 2024, I did start to sense that the labor market might be weakening, not so much because businesses were talking about layoffs, but because they just felt so much pressure to manage costs. They also felt limited for their ability to pass along costs to customers, and when you need to cut costs cutting headcount is one possible avenue. But I would say that somewhere around the holiday season and the turn of the new year, the tone changed. I'm even hearing a few places where labor tightness is a theme again, like certain industrial jobs, healthcare, specialized professional services, and, of course, on top of skilled trades which has been tight throughout.

One last note: when talking about labor, I feel I always need to caution that things can change quickly. We've been describing this as a low firing, low hiring situation, maybe with a tad more hiring than firing, as you can see in job reports. That may not be sustainable for a super long time. These things can change relatively quickly and, historically, when the economy weakens, it's the labor market that changes quite fast.

It's also worth noting that this podcast is being recorded before we really have much visibility into how recent administration policies are affecting the labor market. So, maybe consider what I'm sharing as a baseline.

Waddell: Similar to Renee, our firms have reported flatness in employment, not a ton of hiring and not a ton of firing.

I would say manufacturing has been maybe a little bit more downbeat. We've seen some declines among our manufacturers in employment or expected employment.

But overall, I would say expectations from our surveys remain pretty positive, both in the regional surveys and in the CFO Survey. Certainly, there has been little indication that our surveyed firms expect any sort of sharp decline in employment. In fact, even when more firms were expecting a recession, few, if any, were expecting employment to contract.

Sablik: Besides inflation and the labor market, Sonya, what are some of the chief concerns for businesses that they're reporting in the surveys?

Waddell: Yeah, I can't really say besides the labor market, Tim, because in the fourth quarter CFO Survey, labor availability was still a chief concern. Inflation was also a concern. Monetary policy also bubbled up to the top last year, which I interpret as a concern for where rates will go, which respondents know is a function of the inflation environment. The political climate and the election last year brought a lot of uncertainty, and that remained a concern both pre- and post-election.

Post-election, tariff policies shot up as a concern among CFO Survey respondents. Fifth District survey respondents were also concerned about tariffs. In fact, when we offered a list of key concerns for respondents to pick from in December, 15 percent of respondents wrote in tariffs as a concern when we didn't even actually offer it as an option.

The other popular concern was geopolitical uncertainty. And, of course, there are always the concerns that firms have about any potential future decline in demand for their goods or services. Borrowing constraints seem to be a constant in the minds of many of the firms that we survey.

Sablik: Have those lists of concerns changed compared to 2024?

Waddell: From the responses that we got to our surveys, I think most respondents were happy to get the election and the uncertainty that it brought behind us. With the election results came optimism about a more friendly regulatory environment and concern about uncertainty around, like I said, tariffs [and] changes to immigration policy or other unanticipated policy changes. Firms remain optimistic, but uncertainty might dampen some of that optimism as we go forward. We'll have to pay attention to the next round of surveys, Tim.

Sablik: Renee, what are businesses you talk to saying? Are there certain industries that have a different set of concerns for 2025?

Haltom: You don't hear a lot of concern about recession these days. There are sector-specific focus areas, I'd say. For example, firms in residential or commercial real estate — or even connected spillover firms like furniture or household electronics — are very interested in the path of interest rates, which is probably always true, maybe especially now. Then there are sectors like energy or data centers where there are a lot of policy issues that are always in focus. So, you can always go sector by sector and talk about an array of concerns or focus areas.

Beyond those topics, I couldn't agree more with what Sonya said. We often say businesses can adjust to almost any environment. They just need to know the rules of the game, especially sectors like retail or manufacturing that may be more exposed to tariffs or construction where a larger share of the workforce comes from immigration. That's true even if they expect upside from policy changes. They just want to know where they stand.

Sablik: Renee and Sonya, thank you both so much for joining me today.