Slower growth likely for the U.S. economy

The latest U.S. government review of fourth quarter 2024 Gross Domestic Product (GDP) shows that the economy grew at a 2.4% annualized rate. This represents a slight uptick from initial fourth quarter 2024 GDP readings. The U.S. economy grew by 2.8% in 2024 overall, nearly replicating 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 notably, Trump implemented significant tariff increases with markets prepared for even more tariff announcements. Already in place are an additional 20% tariff on Chinese goods, 25% tariffs on steel and aluminum imports from all countries, and as of late March, a new 25% tariff on imported automobiles and some imported car parts. The ultimate economic impact is unclear, but it’s added a degree of uncertainty for businesses and consumers alike.

Declining consumer sentiment

Notable new data points raising concerns are recent consumer surveys showing declining sentiment. For the second consecutive month, the University of Michigan’s Consumer Sentiment Index in March showed a 10% sentiment decline from the previous month. Sentiment is 27.1% lower than a year earlier.² There’s a lack of clarity about the full impact of Trump’s tariff moves, but they have altered the economic environment, particularly related to international trade.

The Conference Board’s March Consumer Confidence Index found a 7.2% confidence drop from February’s. The Board’s Consumer Expectations Index, reflecting the short-term outlook for income, business, and labor market conditions, dropped to a 12-year low.³

“Consumer confidence surveys are unreliable signals of future economic performance,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “A better correlation is found in jobless claims and real wage growth.” To this point, both initial weekly jobless claims and annual wage gains remain relatively stable, sending no major warning signs. “Despite how consumers respond to surveys, if they have jobs, they still tend to spend money,” says Haworth.

Consumer-driven growth

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.

Early 2025 consumer spending data shows possible slowing. January retail sales fell, with only a modest February recovery. Haworth sees some unusual factors at play. “Weather and wildfire issues likely contributed to slower retail activity. Those seem like temporary factors.” Nevertheless, Haworth says the economic growth rate is likely slowing. One “real-time” measure of GDP growth is the Atlanta Federal Reserve Bank’s “GDP Now” forecast. It currently shows a first quarter annualized GDP decline of more than 1%. However, Haworth points out that Wall Street consensus forecasts are closer to 2%.⁴

The Federal Reserve alters its view

In its first two 2025 policymaking meetings, 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. After its March meeting, the policymaking Federal Open Market Committee (FOMC) members adjusted down 2025 economic projections. Those forecasts reduced economic growth expectations and increased unemployment and inflation projections (based on Personal Consumption Expenditures).⁵

The Fed remains focused on bringing inflation closer to its 2% target while balancing that with a healthy labor market. Inflation for the 12 months ending in February 2025 stands at 2.8%, with February’s unemployment rate at 4.1%.⁶ “A soft landing is still likely,” says Beth Ann Bovino, chief economist for U.S. Bank, describing a slower economy that avoids a recession.

“Trade wars and falling consumer expectations signal both recession fears and inflation fears,” says Bovino. “It’s still not ugly, but the shocks are starting to add up.”

Haworth sees little likelihood that an inflation spurt would force the Fed to raise interest rates before cutting rates again. “Even with 2024’s 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.”

Implications for investors

TThroughout 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, including global stocks, 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.

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.

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.