Compass

Key takeaways

  • The U.S. economy grew 2.8% last year.

  • Fourth quarter growth was slightly less at 2.3%.

  • Solid consumer spending helped keep the economy growing.

The second estimate of fourth quarter 2024 Gross Domestic Product (GDP) data shows the U.S. economy growing at a 2.3% annualized pace. That number is unchanged from the prior month’s “advance” estimate. For all of 2024, the U.S. economy grew by 2.8%, like 2023’s 2.9% growth rate.1

Source: U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” February 27, 2025.

The latest data is a look back at economic activity that already transpired. In 2025, economic conditions may be shifting, due in part to President Donald Trump's pursuit of economic policy changes. Most notable are plans to impose higher tariffs on imports from major trading partners, including China, Mexico, Canada and most recently the European Union. The ultimate economic impact is unclear, but it’s added a degree of uncertainty for businesses and consumers alike.

 

Can economic momentum be maintained?

A notable new data point raising concerns is the University of Michigan’s Consumer Sentiment Index. This survey is used as a measurement of likely future consumer spending and saving. The Index in February showed a 10% sentiment decline, a sign that consumers may be feeling more cautious about the economy than was the case previously.2

Source: University of Michigan, Survey of Consumers, February 21, 2025.

“The consumer sentiment survey represents another sign of caution, similar to what we’re seeing in surveys among small business owners and purchasing managers,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Caution is also apparent in commentaries tied to corporate earnings reports, as executives aren’t particularly forthcoming with 2025 earnings guidance.”

“Signs indicate that the economy remains fairly robust, and it still looks like companies are positioned to grow earnings at double-digit levels in 2025 and 2026,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.

Haworth notes this hasn’t yet led to any noticeable economic growth adjustment “It does appear many people are delaying making decisions until they absolutely have to make them,” says Haworth. “They are uncertain about specifics of new Trump administration policies and what it might mean for prices and economic activity.”

To this point however, there are no clear signs of a major economic slowdown. “Signs indicate that the economy remains fairly robust, and it still looks like companies are positioned to grow earnings at double-digit levels in 2025 and 2026,” says Haworth, “That should support stronger equity markets in 2025, though other factors may impact equity prices in the short term.”

 

Consumer-driven growth

Consumer surveys draw attention because healthy consumer spending is the key to ongoing U.S. economic growth. According to the U.S. Bureau of Economic Analysis, personal consumption expenditures generated close to 3% of the economy’s fourth quarter expansion, one of strongest quarters of consumer activity in recent times. Net exports and government spending made modest contributions, while private investment significantly detracted from fourth quarter growth.1

Source: U.S. Bureau of Economic Analysis. Consumer Spending represents Personal Consumption Expenditures. Private investment includes business expenditures. Government includes federal, state and local government spending. As of December 31, 2024.

A key question now is whether consumers can maintain spending levels to the extent necessary to keep the economy growing. Eric Freedman, chief investment officer for U.S. Bank Asset Management, expresses a note of caution. “Data is beginning to show that lower income and some middle-income consumers are feeling pressure. The combination of higher interest rates and higher costs are starting to weigh in.” Freedman says if interest rates remain elevated, consumers will feel more pressure. “We’re past the holiday season, so this is a real key test for how durable the consumer will be.”

Haworth notes that despite recent dips in consumer sentiment, it isn’t a sure sign of things to come. “In 2023 and 2024, persistently-high inflation led to negative consumer sentiment, but spending levels remained strong, boosting the economy. A similar scenario is possible here.”

 

How will the pace of economic growth influence monetary policy in 2025?

In its initial 2025 policymaking meeting in January, the Federal Reserve (Fed) stood firm on the federal funds target rate, leaving it within a range of 4.25% to 4.50%. That’s down 1% from its pre-September 2024 fed funds rate peak. However, market expectations are for only two Fed rate cuts in 2025,3 and Fed chair Jerome Powell stated after January’s meeting that the Fed will need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”4

The Fed remains focused on bringing inflation closer to its 2% target while balancing that with a healthy labor market. Inflation rose 3.0% for the previous 12 months through January 2025 and the unemployment rate stands at 4.0%.5

Chart depicts the Consumer Price Index, a measure of inflation, from January 2024 - January 2025.
Source: U.S. Bureau of Economic Analysis, as of January 31, 2025.

“Even with its rate cuts, the Fed today is still in a restrictive monetary stance and likely believes that it is already sufficiently positioned to fight inflation,” says Haworth. “The labor market is likely the Fed’s primary focus today, which means the next interest rate move is more likely to be a cut, particularly if we see signs of job market weakness.”

 

Implications for investors

Throughout 2024, the economy’s ongoing strength helped corporations meet or exceed earnings expectations. For the second consecutive year, the S&P 500 generated total returns topping 25%.6 Haworth says the earnings outlook remains favorable. “There appears to be a sufficient level of economic growth to keep the market buoyant, although likely with a degree of volatility.”

In the current environment, investors may wish to consider a modest overweight in equities and a modest underweight in fixed income, with a neutral position in real assets. Haworth says this reflects an economic environment that, in the near term, appears to put equities in a position to outperform fixed income.

If economic growth tracks closely to the previous two years, Haworth says there may be some market rotation that works to the benefit of stocks that in 2023 and 2024 underperformed the broader market. “Attention may turn to where earnings are growing,” says Haworth. “We may see more beneficiaries going beyond those technology companies that dominated the markets in 2023 and 2024 based on the artificial intelligence investment boom.”

Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet your needs in today’s market and economic environment.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

Frequently asked questions

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Disclosures

  1. U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” February 27, 2025.

  2. University of Michigan, Survey of Consumers, February 21, 2025.

  3. Federal Reserve Board of Governors, “Summary of Economic Projections,” released March 19, 2025.

  4. Mercado, Darla, “Fed decision recap: Powell says tariffs could delay progress on lowering inflation,” CNBC.com, March 19, 2025.

  5. Source: U.S. Bureau of Labor Statistics.

  6. S&P Dow Jones Indices.

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