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
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.
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
“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 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
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.”
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
“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.”
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.
A recession is a significant and prolonged downturn in economy activity. Some define a recession as two consecutive quarters of declining Gross Domestic Product (GDP) growth. However, more complex formulas are often used. The accepted arbiter of a recession, the National Bureau of Economic Research (NBER), considers a variety of measures to determine a recession’s timing and length. These may include nonfarm payrolls, industrial production and retail sales, along with key measures such as GDP. Quite often, the NBER makes a final recession determination months after it begins.
The most recent recession was an unusual one, related to the start of the COVID-19 pandemic. It lasted only from February through April 2020, one of the shortest recessions on record. But it also was one of the most severe. According to the U.S. Bureau of Economic Analysis, the U.S. economy declined at an annualized rate of 5.5% in 2020’s first quarter and declined again by 28.1% (annualized) in the second quarter. However, it quickly rebounded, growing by a 35.2% annualized rate in the third quarter. This was an unusual circumstance related to the partial closing of many businesses and schools and the sudden layoff of workers in response to the onset of the pandemic, followed by a rapid reopening for most businesses. The previous recession occurred more than a decade earlier, the so-called Great Recession of 2007-2009. This recession was tied to the financial crisis that rocked the global economy for an extended period.
While it is difficult to predict a recession in advance, the current state of the economy makes the possibility of a recession in the near term appear remote. “It seems likely the economy may avoid a recession in the near term, though we can expect that real Gross Domestic Product (GDP) growth will remain modest over time,” says Matt Schoeppner, senior economist at U.S. Bank. In 2024’s first quarter, the economy grew at an annualized rate of 1.6%, but improved significantly in the second quarter, growing at a 3.0% annualized rate, followed up with 3.1% annualized third quarter GDP growth and 2.3% fourth quarter 2024 annualized growth.1
Persistently higher mortgage rates are slowing U.S. housing market activity.
After being inverted for much of the last two years, yields are reverting to a more normal curve across Treasury securities of varying maturities.
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