This article originally appeared in the January 2025 issue of THE SHOP magazine.
Clearing skies with a chance of showers.
Projections say retailers can look forward to a gradually improving operating environment in 2025, thanks to lower interest rates, moderating inflation, healthy employment figures and steady-if-unspectacular growth in the nation’s overall economic activity.
“We anticipate an OK-but-not great year for retailers—very similar to what they experienced in 2024,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics.
There will be some pressures on aggregate spending, such as interest rates that remain fairly high—even though they are gradually lowering—but there will also be some supports, such as lower inflation.
Hoyt’s estimates for year-over-year sales growth are 3.1% for 2024 and 3.5% for 2025. That compares with the 5.3% seen in 2023.
“The marked slowdown is price related,” he explains. “It’s due not so much to any decline in the amount of merchandise being moved as much as a slowdown in goods price inflation, which was quite high in 2023.”
Pricing power will remain relatively weak—almost as weak as it was prior to the pandemic, Hoyt continues.
“Growth was a lot less price driven in 2024 than in 2023, and we see a similar scenario in 2025.”
The pattern of retail numbers is reflected in the larger figures for the economy as a whole.
“We look for real GDP growth of 2.5% in 2025,” says Bernard Yaros Jr., lead U.S. economist at Oxford Economics.
By definition, Gross Domestic Product, the total value of the nation’s goods and services, is the most commonly utilized measure of economic growth. “Real” GDP subtracts the effects of inflation.
The good news is that the 2.5% boost is not far off what economists peg as the nation’s “natural growth rate”—one that supports business activity and maintains full employment. And reduced volatility in the GDP growth pattern in recent years suggests the nation is on a glide path to a so-called “soft landing,” avoiding a recession after a lengthy inflationary binge (see sidebar).
Despite its positive nature, the GDP figure for 2025 is slightly lower than the anticipated 2.7% when 2024 numbers are finally tallied. That’s because the nation is in a so-called “late-stage expansion,” characterized by a tendency to slow down while maintaining sufficient force to invigorate commercial operations.
FAIR WINDS
In 2025, retailers can look forward to a decline in both interest rates and inflation—two bugbears that have drained profits in recent times.
“We anticipate a federal funds interest rate of 2.75% by the end of 2025, down from a recent 4.75%,” says Yaros, “and we look for inflation to average 2.2% in the final quarter of 2025, which will be within spitting distance of the Fed’s 2% target.”
That’s an improvement from the 2.5% inflation level toward the end of 2024.
Note: The figures represent the Federal Reserve’s preferred measure of inflation—the “core personal consumption expenditure deflator (PCED),” which strips out volatile food and energy prices.
“Retailers are almost getting the worst of both sides of the inflation coin right now,” says Hoyt. “There’s not a lot of goods inflation, so that is not helping retail revenues. But there is also a lot of services inflation, which eats into retailers’ real incomes, while also leaving consumers with less money to spend on goods.”
It’s expected that relief from the costs of interest and inflation will help support business profits in all sectors, retail included.
“We anticipate corporate profits will increase 9.6% in 2024 and 9% in 2025, up from their 6.9% gain in 2023,” says Yaros.
HEALTHY EMPLOYMENT
Retailers do better when shoppers are optimistic. And, while consumers remain troubled by the residual effects of inflation in the form of high prices for gas and groceries, they remain in a fairly good mood, experts agree.
“We look for consumer confidence to move slightly higher in 2025,” says Hoyt.
Why the optimism? Healthy employment levels, for one.
“We look for the unemployment rate to end 2025 at 4.2% and 2026 at 4.2%,” says Yaros, which is roughly in line with the 4.1% reported toward the end of 2024.
Note: Many economists peg an unemployment rate of 3.5% to 4.5% as the sweet spot that balances the dual risks of inflationary wage escalation and economic recession.
If favorable unemployment figures will encourage consumer spending, retailers should also enjoy relief from the deleterious effects of the past year’s tight labor conditions. Because of an anticipated de-escalation in the pace of immigration, economists expect the labor force to grow more slowly than employment levels.
Indeed, a slowdown in the rate of hiring has already helped loosen the employment market.
“Labor shortages are a thing of the past in most regions,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. “When companies want to hire, they’re able to find the people they want, unless they’re looking for something really unusual or if they’re not willing to pay the required salary.”
Speaking of salary, employers are experiencing some much-needed relief in the rising trendline of worker wages.
Softening employment growth has given workers less power to demand higher wages. Entry-level hourly wage increases came to 3.7% in 2024 at companies belonging to The Manufacturers’ Association, a York, Pennsylvania-based consortium of nearly 500 companies.
That’s markedly lower than the vigorous 8%-10% levels clocked for each of the previous two years. Historically, such increases have tended to settle in the 2.5% to 3% range.
National figures concur.
“The Employment Cost Index (ECI) is slowing,” says Hoyt, referring to a common measure of average worker wages. “We are forecasting 2.8% growth in 2025, compared to 3.9% in 2024 and 4.5% in 2023.”
Despite the ongoing de-escalation in the ECI, Hoyt says it remains healthy enough to support consumer spending, as does the expected increase in the nation’s total personal income level, an important driver of business activity. Like the ECI, it is expected to follow a familiar 2025 trendline: a healthy increase despite de-escalation.
“Mainly because of slower job growth, we have the increase in wage and salary income slowing to 4.7% in 2025, compared to our expectation of 6.6% for 2024, and 5.4% for 2023,” says Hoyt.
HOUSING REBOUNDS
Economists expect healthy growth in housing activity, a mighty driver for the economy in general and retail sales in particular.
“We forecast housing starts to increase by 6.2% in 2025, after falling by 4.7% in 2024 and declining 8.4% in 2023,” says Yaros.
Why the rebound? A decline in the cost of money and a concomitant loosening of credit standards.
“Lower mortgage rates should help the single-family home market,” says Conerly. “It will be a little less painful for people with 3% or 4% mortgages to give them up, sell their current houses and move up.”
Lower interest rates should also reinvigorate commercial construction activity—a sector that has been underperforming.
“The non-residential side has a kind of bad reputation right now, especially when people think of downtown office or downtown retail,” says Conerly. “But office and retail are doing OK in many suburban areas. And a lot of the retail sector has been under-built. People thought we were totally abandoning going to the store, and it turns out we’re not.”
When it comes to projects such as multifamily residential, hotels and offices, a change in fortune will not happen overnight.
“With lower interest rates, there’ll be an easier time lining up project financing at acceptable cost,” says Anirban Basu, chairman & CEO of Sage Policy Group. “But these things take time. We might see some softness in a meaningful fraction of contractors in 2025. And then perhaps things get a bit better in 2026 as these lower interest rates prompt more activity.”
Sectors that should do well out of the gate include large-scale infrastructure projects, computer chip and battery manufacturing plants and data centers.
“This is the era of the megaproject,” says Basu. “Future prospects are quite positive for contractors who are able to participate in major public works.”
Much of this is driven by the reemergence of industrial policymaking in America, an economic transformation that has led to programs such as the Inflation Reduction Act, the Chips and Science Act, and the Infrastructure Investment and Jobs Act.
Finally, construction is also benefitting from a return of the supply chains to the United States.
THE ROAD AHEAD
Despite optimism on the part of businesses and consumers, economists eye some dark clouds on the horizon. In the opening months of 2025, they advise keeping a close watch on the following areas for any deleterious effects:
Labor
“Retailers should start the year by looking at trends in job growth and the unemployment rate,” Hoyt advises. “They are so important for consumer confidence and spending power.”
Interest rates
“Going forward, the major concern for businesses will be the pace of interest rate cuts and where they will end up,” says Yaros.
Inflation
“If the consumer price index returns to positive territory, that could throw a monkey wrench into many business plans,” says Conerly.
Tariffs
“Retailers should watch what happens with tariffs, because that will impact costs of goods sold, given that so much is imported from China,” says Hoyt.
Geopolitics
“An increasing level of turmoil around the world can disrupt supply chains, throwing a monkey wrench into the economy,” says Conerly.
As concerning as these risks are, economists anticipate a fairly benign operating environment in 2025 overall.
“The U.S. economy has been remarkably resilient despite all the hits it’s taken over the past few years,” Yaros concludes. “We don’t anticipate a recession, as the Federal Reserve will be dialing back the restrictiveness of monetary policy and there are no glaring imbalances in the economy.”
