U.S. economic momentum shifts, but growth continues

The economy entered late 2025 with real momentum, and it still shows signs of forward progress. The latest data show a clear change in speed, and that shift matters for investors who want to separate headlines from lasting trends. When growth cools, markets often react faster to new information, even if the broader direction stays positive.

What’s the U.S. economic outlook?

The fourth quarter brought an unusual complication: a federal government shutdown that disrupted spending and delayed data. That shutdown pulled down the headline growth rate and complicated quarter-to-quarter comparisons. Even so, several measures still point to an expanding economy, led by consumers who keep spending while they pay closer attention to price and value.

This mix – slower growth, still-active consumers, and uneven inflation progress – creates a different investing climate than earlier in the cycle. In a faster-growth period, markets can rise on broad optimism about profits and expansion. In a slower-growth period, investors often reward discipline, diversification, and companies that execute well in a more demanding environment.

What happened to GDP growth in the fourth quarter?

The Bureau of Economic Analysis reported real gross domestic product (GDP) rose 1.4% annualized in the fourth quarter. ¹ That reading came in below consensus economist expectations and dropped sharply from the third quarter’s 4.4% pace. ¹ The late-year shutdown weighed heavily on federal spending and official estimates suggest it reduced growth by roughly one percentage point. ¹

Investors should not treat the headline GDP number as the only scorecard, especially when a one-time event distorts the reading. When you set aside the shutdown-related drag and other swing factors, consumer spending rose 2.4% and investment increased 3.8%, while housing-related activity stayed under pressure. ¹ Those offsets point to slower growth built on real demand, not a sudden drop in private activity.

Inflation data released alongside the report underline why the Federal Reserve can stay patient but cannot ignore stubborn price pressures. The GDP price measure rose at a 3.7% pace in the fourth quarter, and personal consumption expenditures, a gauge tied to household spending, ran at 2.9% year-over-year in December. ¹ Measures that strip out some volatile price categories remained higher, which helps explain why the Fed continues to move carefully.

Consumer spending, retail sales, and labor market signals

Consumer spending remains the key driver of the U.S. economy, and consumers’ choices matter for both growth and corporate profits. The fourth-quarter spending number shows households still increased purchases, even after a strong third quarter. ¹ At the same time, the pace slowed, which fits a world where borrowing costs remain high and some budgets feel tighter.

Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, captures this tension in plain terms: “Data show that high interest rates and higher costs are pressuring lower income and some middle-income consumers.” That pressure does not mean consumers stop spending, but it can change what they buy and when they buy it. For investors, those shifts can separate companies that meet essential needs from those that rely more on discretionary demand.

Retail sales data for December reinforce the theme of resilience with more selectivity. The Census Bureau’s advance estimate left December retail and food services sales virtually unchanged from November, and up 2.4% from a year earlier. ² The same release showed online retailers up 5.3% year over year and food services and drinking establishments up 4.7%, which suggests consumers still spend on convenience and experiences even as they watch value.²

The labor market adds another layer to the consumer story, because steady paychecks often keep spending afloat. In the January 2026 jobs report, payrolls rose by 130,000 and the unemployment rate held at 4.3%, which points to stable conditions on the surface. ³ At the same time, job openings fell to 6.5 million, ⁴ while the number of unemployed people also fell, to 7.4 million. ³ Wages rose 3.7% from a year earlier. ³ This signals that hiring demand has cooled even as income growth still supports household budgets.

These labor market signals matter because they often shape how quickly consumer spending can grow from here. When employers hire more slowly, households typically lean more on existing income and savings rather than new job opportunities. Even so, steady wage gains can help many consumers maintain spending plans so long as inflation does not reaccelerate.

Will the Fed cut interest rates in 2026?

The Federal Reserve cut rates by 0.75% in 2025 after cutting by 1% in late 2024. Chair Jerome Powell has stressed that the path ahead is far from a foregone conclusion, and the latest data support that cautious approach.

Market pricing also points to a slower, more deliberate path for additional cuts. The Fed currently projects one additional rate cut in 2026, ⁵ while market expectations lean toward two to three.⁶ That timing matters because borrowing costs influence everything from mortgages and auto loans to the cost of financing business expansion.

Policy uncertainty can still shape confidence even when the day-to-day data stay steady. President Donald Trump's shifting trade policies can change business planning and influence how consumers think about future prices. Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group, summarizes the current setup this way: “Consumer resilience in the wake of tariff uncertainty continues to lead GDP growth.”

Market outlook: What this means for investors

The investment picture combines support and friction at the same time. Ongoing growth and steady consumer demand support corporate earnings expectations, while lower rates can help interest-sensitive areas over time. At the same time, higher costs for some households, uneven inflation progress, and shifting policy headlines can move sentiment quickly.

A slower pace of growth does not automatically signal a recession, but it can change how markets behave. In a cooling environment, investors often demand clearer evidence of earnings strength and business quality. That shift can reward patience and diversification, especially when headlines try to pull attention toward short-term swings.

You do not need a perfect forecast to act with confidence. Build a plan around your goals, time horizon, and risk appetite. Then use that plan to guide decisions when the news cycle turns noisy. A conversation with a wealth management professional can also help you translate economic signals into steps that fit your situation.

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.

FAQs

What is a recession?

What is a recession? A recession is a broad and sustained decline in economic activity. People sometimes use two straight quarters of falling GDP as a quick rule of thumb, but that shortcut can miss important details. In the U.S., the National Bureau of Economic Research weighs several measures, including jobs, production, income, sales, and GDP, and it often makes its determination after a downturn has already begun.

When was the last recession?

When was the last recession? The most recent recession began with the COVID-19 shock in early 2020. It lasted only a few months, but it was severe because shutdowns quickly disrupted work and spending. The prior recession was the 2007–2009 period tied to the financial crisis.

Is a recession coming in 2026?

No one can predict recessions with certainty, and the economy can change quickly. Today’s data still show growth and ongoing consumer spending, which generally lowers near-term recession risk. The key things to watch include job trends, credit conditions, and whether inflation stays high enough to keep interest rates restrictive for longer.