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 U.S. economy, as measured by real gross domestic product (GDP), grew at a 2.8% annual rate in 2024. This was narrowly below 2023’s 2.9% real GDP growth rate. Based on the Advance Estimate of fourth quarter 2024 GDP, the economy slowed a bit, growing by 2.3% down from the 3.0% or greater levels of the previous two quarters.1 This was modestly below market expectations, but still considered a solid quarter of economic activity.
“Even with the pace of growth slowing, 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.
From an investment perspective, a key question is whether slower growth will alter the stock market’s momentum. “Even with the pace of growth slowing, 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, U.S. Bank Asset Management. “That should support stronger equity markets in 2025, though other factors may impact equity prices in the short term.”
As has been the case historically, 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 with 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 agrees that consumers’ ability to drive ongoing economic growth is a factor that, as 2025 continues, bears close attention. “If companies hang onto employees and inflation remains more modest than it’s been, it should help keep the economy on track.” Haworth admits, however, that there is a divergence among consumers. “The higher-income consumer has the additional advantage of having assets, so they benefit from appreciating portfolio values and high income on their savings,” says Haworth. “The lower-income consumer doesn’t have that backstop.”
The Federal Reserve (Fed) held its first 2025 policymaking meeting just prior to the fourth quarter’s GDP data release. The Fed stood firm on the federal fund target rate, leaving it within a range of 4.25% to 4.50%. That’s down 1% from its pre-September Fed meeting peak. However, market expectations are for only two Fed rate cuts in 2025,2 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.”3
The Fed remains focused on bringing inflation closer to its 2% target while balancing that with a healthy labor market and unemployment rate close to today’s 4.1% level.4
“The Fed today is the most hawkish of the major global central banks,” says Haworth, referring to the Fed’s relatively conservative rate-cutting stance. “The economy seems poised to continue growing, which gives the Fed more leeway to slow the pace of interest rate cuts.”
Markets are also closely watching how the new Trump administration's policies could impact the underlying economic environment. President Donald Trump has frequently proposed expanding tariffs on foreign goods imported into the U.S. and stepping up the deportation of undocumented immigrants. “Nobody knows what to expect from the White House,” says Beth Ann Bovino, chief economist for U.S. Bank. “The policy moves are still very unclear, but we do know that a number of those proposals that have been talked about by the White House are a bit inflationary, and I think that’s going to keep the Fed in check.”
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 exceeding 25%.5 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 of equities and a modest underweight of 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 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, and followed up with 3.1% annualized third quarter GDP 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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