Say Goodbye to 2% Plus GDP Growth

August 27, 2025

By Robert Wiedemer

You have probably seen a number of articles about a slowdown in the economy. The poor job numbers for the first half of the year, based on revisions, have only added to concern about a slowdown. We have gotten used to GDP growth of 2.5% to 3% annually over the past decade. I think that’s about to change and, not just short term, but longer term.

I think we will struggle to get 2% growth going forward. That’s because there are big long-term factors at work here. I will discuss a few of those factors in this article and why this slowdown likely won’t affect stock market growth.

Housing Slowdown Is the Big Culprit

Housing is the biggest problem. We have already seen home sales decline from 6 million per year to 4 million. However, home construction has been robust and has only recently begun to turn down. Although many are hoping we are seeing the bottom, I don’t think so. That’s because the 10-year interest rate isn’t going to fall that much and could even go higher. I have discussed the reasons for this in past articles, so I won’t repeat them here.

The bottom line is that purchases of both new and old homes will fall if rates don’t go down a lot. Another problem is that, according to the Case-Shiller home price index, prices have now fallen for four consecutive months. Although you would think falling home prices attract more buyers, they don’t.

They actually scare away buyers or at least make them postpone their decision. Why not wait for prices to go down further? Also, homes are a very highly leveraged purchase – often to the tune of 90% debt or more. It doesn’t take much of a decline to wipe out all of your equity.

Buyers today really have to stretch their income limits to buy a home. If home prices have been falling for a year or two, they will be less likely to stretch those limits. And with prices as high as they are today plus high interest rates, a small reduction in price won’t make houses more affordable.

In fact, because of higher mortgage rates, house prices should have adjusted by about 30% to offset the increased price of a mortgage. However, we’ve only seen small price decreases and only in the last few months. Prices are a long way from adjusting to higher interest rates. Remember, the 20-year Treasury bond has fallen 50% in value due to rising interest rates.

I hear housing analysts often say we have a housing shortage. That’s nuts. There’s plenty of high-priced homes out there. We have a shortage of affordable housing. Owners aren’t willing to sell their homes at lower prices. That will eventually change, and prices will have to come down to a level people can afford even with high mortgage rates. But, falling prices will also scare away buyers. This is a long-term problem and because housing is so important, it will be a long-term drag on the economy.

Office, Retail and Hotel Construction Downturn

Similar to housing, high interest rates greatly affect office, retail and hotel construction. The American Institute of Architects has seen billings for their members decline almost every month for the past two years. That sort of decline is unprecedented. Clearly, construction in architect-intensive real estate like offices, hotels, retail and apartments is slowing.

Just take a look around your city and I bet you will see what I have seen in cities like Boston, New York, Washington DC, Houston and Phoenix. Fewer and fewer construction cranes. In fact, early this year, there were no new office buildings being started in Washington DC. That’s almost never happened. And that was before the effects of recent cuts in government employees.

Less construction not only affects construction jobs, but jobs at the companies that supply the materials for construction. Plus, once those buildings are finished, there are jobs with the new retailers, hotels, and offices. All of that is declining. And, like housing, this is a long-term trend, especially for offices but also for our overbuilt retail markets.

Slowing White Collar Employment Growth

White collar job growth is slowing. We can see that in the job statistics and in the difficulty college students have landing jobs. White collar workers getting laid off are having a harder time finding work.

Part of the problem is the two issues I just mentioned – the housing slowdown and commercial construction slowdown. Both of these issues reduce employment in finance, real estate, insurance, retail and hotel managers, law and other key areas of white collar employment.

I suspect another part of the white collar slowdown is a long-term effect of the Covid pandemic and, in particular, working from home. There has long been a level of white-collar fat in bureaucracy, not just in government but also in big business. It’s never politically popular to cut that fat, which is why it most often takes a merger or some other drastic event to force a cut.

However, when people work from home they are easier to cut. Their connection with other people in the office is not as strong. You’re simply easier to lay off. More importantly, if you leave, there is less urgency to hire a replacement. This is partly because part of the incentive supervisors often have to hire people is that they get to boss them around at the office. They like having people in the office to boss around. For many supervisors, bossing around people who work form home is not as satisfying.

I don’t think this shows up as much in more layoffs as it does in supervisors being less interested in filling a vacancy. The company might even put out an ad to hire someone but just takes forever to fill the position – looking for just the right person with just the right experience, which they may not find.

Immigration?

The Wall Street Journal just ran an article talking about the big decline in immigration. We may actually see a net out migration this year – the first in many decades. It’s too early to tell if this is a long-term trend but it could be important for economic growth.

For example, I recently read that Atlanta, a booming city for many decades now, has stopped seeing any domestic migration. The only migration was from foreign migration. If foreign migration to Atlanta or other high growth cities also slows or stops, economic growth will slow further. Again, it’s too early to say if this is a long-term trend, but it is definitely worth keeping an eye on.

Less Government Borrowing?

Although I don’t worry too much about this since our government seems to be reliably irresponsible, deficit spending is a key factor in our economic growth. If growth in government borrowing slows down so will our economic growth. Again, this is not a factor I am very concerned about, but worth mentioning because it is so important. Also worth mentioning is that a big increase in government borrowing could offset some of the other economic problems I just mentioned.

Slower Economic Growth Likely Won’t Affect the Market Too Much

You might be thinking that this slowdown in long-term growth would be bad for the stock market. However, the markets don’t seem to be that sensitive to it. Sure, they will talk about it, but will the markets actually slow down much because of it? I doubt it. Now, if the economy headed into a long-term recession, that would be different. But just a long-term slowdown won’t affect the market partly because it’s not a big shock.

Most importantly, markets these days are affected more by investment flows than modest changes in the financial or economic environment. In particular, money flows to where it performs the best. And that will be the stock market. Bonds have been a terrible investment and will likely remain unattractive unless interest rates take a big drop, which is unlikely. Of course, a big drop in interest rates would also help stocks.

Real estate, and especially commercial real estate, is now often a distressed asset investment. Not very appealing. Long gone are the days of the golden commercial real estate markets of DC, California or Texas. And I don’t think they will be golden again any time soon for the reason I gave earlier.

Finally, foreign stock markets, which had some sunny days earlier this year when the US stock market went down, are only matching US stock performance now and could easily become laggards again. They are not an attractive long-term alternative to US stocks for large amounts of capital.

Another big flow of capital into the stock market is coming from the continued strength of corporate stock buyback. As of August, we have already passed $1 trillion in announced buybacks for the year. Expectations are for at least $1.1 trillion of executed buybacks this year and at least $1.2 trillion next year. These are big numbers and provide another support for rising stock prices despite a slowdown in economic growth.

Will AI Save Us and Provide a Big Economic Boost?

So far, there is little hard evidence it will. However, there is certainly no lack of people who say it will. Just about everybody tells me it will change everything.

However, this reminds me a little of the early years of self-driving vehicles. Just about everybody told me that I would be tearing up my driver’s license in 10 years, as would every truck driver, even though there was little tangible evidence at the time that self-driving was actually becoming practical in a big way. Interestingly, some of the same people who were touting self-driving vehicles being able to get rid of all driver’s licenses are touting AI today as putting everyone out of work because it is so productive (Mr. Musk, are you listening?)

Ten years later I still have my license and so do 242 million other licensed drivers and about 3.5 million truck drivers. Maybe I just have to wait a little longer and my driver’s license will be headed for the trash can. We’ll see.

The same could be true with AI. It might save us, but the timeline could be quite a bit longer than everyone expects. For now, I need to see a little more tangible evidence of big changes in productivity and employment before I enter AI into my calculations.