What lies ahead for the economy?
Inflation remains a concern, especially for lower-income consumers with rising food costs
The following article appeared in the Feb. 28, 2025, edition of The Charlotte Ledger, an e-newsletter with smart and original local news for Charlotte. We offer free and paid subscription plans. More info here.
Q&A: U.S. Bank’s Eric Freedman on consumer spending, the threat of inflation and the outlook for stocks
It is definitely an interesting time for the economy.
There are new policies coming out of Washington, hopes for lower interest rates and lingering concerns about inflation. (Have you seen the price of eggs?)
With seemingly conflicting data coming out daily, The Ledger turned to Eric Freedman, chief investment officer for U.S. Bank Asset Management, to help make sense of where we are, where it is going, and what it all means for your pocketbook and the stock market.
Freedman talked with Ledger editor Tony Mecia earlier this month. Remarks were edited for clarity and brevity:
Q. Where do you see the economy going?
We still have an optimistic glass-half-full perspective about the economy. The analogy that we like to give is that the economy is like a runner on treadmill, and to be sure, the runner has been slowing down a bit.
The ramp on that treadmill is interest rates and higher prices and various things that can slow a consumer down. So we think that the the runner is going to keep running, but just slow down to a jog, as opposed to a brisk jog, where it is right now.
One of the things that we've been really focused on is just how sticky is inflation. … There has been a steady increase in food costs.
Then, if you layer on top of that the threat of tariffs, people like us pencil in somewhere between about a quarter to a half percent increase in inflation if tariffs come in where they’re expected to come in. Inflation in this country is running at about a 2.8% to 3.2% level. You add another half percent onto that, it’s a pretty high level of inflation price increases, especially for those consumers who are really impacted most by shelter costs, food costs, transportation costs. Those tend to be lower-income consumers.
Q. How do you think, generally, consumers are holding up? It seems like one of the surprises from the last few years is there are always predictions of consumers pulling back, but it seems like they've been fairly resilient against expectations. Where do you see that going?
Resilience is a great word for it. I think that what we’re seeing is a real divergence now between middle-income and wealthier customers.
If you are a lower-income consumer, you’re spending a disproportionate amount of your income on transportation costs, shelter and food. In some cases, north of 75% or 80% of what you spend is in those three categories.
Discount retailers and grocery stores that tend to focus on lower-income consumers are seeing consumers that are being very thoughtful about the size of their actual consumer basket.
But the higher end is still going, still spending. You know, there was the thought that perhaps post-Covid, there would be this wave — I think they call it “revenge travel.” But after that initial wave, the thinking was that there’d be a slowdown, and that actually hasn’t happened. You’re still seeing people go out and spend money.
The other thing that really gets ignored is this idea of what are companies spending money on? And corporate capital expenditures remain very robust. There certainly has been a big push towards tech spending. You can’t open up a publication and not read about artificial intelligence. That’s another tailwind for the economy — that tech spending continuing.
Q. Are there any particular market segments that you like? I'm not asking for stock tips, per se, but the NASDAQ last year just took off. Tech companies did well. What might be some opportunities?
Our three favorites would be No. 1, consumer discretionary companies that focus on that middle- and upper-income consumer. The companies that so far are doing the best and taking the most advantage of AI are in that industry.
Our second-favorite would be technology, even though it’s already done really well. We think spending will continue in cloud and software. Semiconductors is less interesting. The time to be really involved with semiconductors was the last couple years. The time to be involved in cloud and software is more now.
The third sector would be financials. The valuation is certainly there.
The other area that we’re spending more time on is non-U.S. stocks, which really have been laggards for a long time. It’s not because we think there are necessarily massive growth prospects out of Europe or Japan, but we do think that companies are becoming a bit more shareholder-friendly. For a long time, you had these huge conglomerate companies that are now a lot smaller — more focused on returning shareholder value to investors — as opposed to being these huge super-mammoth entities that make toasters and bicycles and quantum computers. They’re becoming a bit more streamlined.
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