Fifth District Firms Are Optimistic Going Into 2025

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Around the start of the new year, the Richmond Fed adds questions to its monthly business surveys to gauge Fifth District firms' expectations for their business and for the U.S. economy in the upcoming year. In the previous two years, firms were cautious in their expectations, with about half of firms optimistic while one in five firms were pessimistic about the coming year. (For previous analyses, follow these links for the 2023 outlook and the 2024 outlook.) This made sense as the past two years experienced residual effects from the COVID-19 pandemic, decades-high inflation, and an extremely tight labor market. However, firms relayed significantly more optimism going into 2025, both for their own firms and for the U.S. economy. When firms were asked about their concerns for 2025, geopolitical uncertainty, worker availability, and tax rates topped the list.

Firms Report Increased Optimism About Business Conditions Going Into 2025

Fifth District firms reported much optimism going into the new year. When they were asked about their expectations for their own businesses in 2025, 72 percent reported they were somewhat or very optimistic. This is a noticeable uptick in optimism compared to previous years, where about half of businesses reported they were optimistic. Additionally, 13 percent of businesses in this year's survey reported they were either somewhat or very pessimistic, which is down from 24 percent in 2023 and 20 percent in 2022. This increase in optimism was consistent for manufacturing and services firms, as optimism increased by 20 percentage points and 24 percentage points, respectively.

In addition to being optimistic about their own firms' prospects, responding firms were also optimistic about the U.S. economy. Almost two in three firms were somewhat or very optimistic about the U.S. economy, up from 31 percent in 2023 and 24 percent in 2022. Interestingly, the share of firms that reported any level of pessimism significantly dropped to 16 percent, compared to 45 percent in 2023 and 51 percent in 2022. These increases in optimism were found in both the manufacturing and the services surveys, as firms reported a 30-percentage-point increase and a 32-percentage-point increase in optimism compared to the previous year, respectively.

Firms Have Concerns About 2025 Despite Their Optimism

In our December 2024 survey, we asked firms to rate their level of concern among several topics for the new year. Geopolitical uncertainty had the largest share of businesses reporting "Very concerned" (29 percent). This issue also had the lowest share of firms reporting "Not concerned at all" (13 percent). Manufacturing firms were more likely to be "Very concerned" about geopolitical uncertainty compared to services (38 percent versus 26 percent). Concerns around worker availability and domestic demand for goods and services were rated the second most concerning issue, both at 24 percent. Services firms were more concerned about worker availability than manufacturers (27 percent versus 18 percent).

Among all firms surveyed in December, 29 percent were "Very concerned" for geopolitical uncertainty. However, when we looked at concerns among firms that were pessimistic for their own firm or for the U.S. economy, the proportion of firms that were "Very concerned" about geopolitical uncertainty doubles (52 percent among those pessimistic about their own firm and 58 percent pessimistic about the U.S. economy). Domestic demand for goods and services also increased for firms very concerned for their own firm or for the U.S. economy compared to the total. The only noticeable difference in concerns between those pessimistic for their own firm and those pessimistic about the U.S. economy was the expected availability of inputs/supply chain constraints. Those pessimistic about the U.S. economy were more likely to be "Very concerned" than those pessimistic about their own firm (35 percent versus 14 percent, respectively).

Looking Ahead to the New Year

Every new year brings its challenges and opportunities. Despite increased optimism for 2025, survey respondents also mentioned several challenges. According to the December 2024 survey, two-thirds of responding Fifth District firms source inputs from outside the United States. This could explain why multiple survey respondents mentioned uncertainty about impacts from potential tariffs. Firms also mentioned labor availability impacting their operations and uncertainty around general economic and business conditions. No one can see into the future, but as the new year unfolds, the Richmond Fed will continue to monitor business sentiment to gauge how Fifth District businesses are faring.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.