Key takeaways
The U.S. economy appears on track to produce annual growth above 2% in 2024.
Solid consumer spending helped keep the economy growing.
Questions remain about lies ahead for economic growth, inflation and interest rates in 2025.
The government’s third estimate of Gross Domestic Product (GDP) growth showed the economy expanding at an annualized 3.1% rate in the third quarter of 2024.1 This proved to be the strongest quarter to year-to-date, as third quarter data was adjusted modestly upward from earlier estimates showing 2.8% growth. While the fourth quarter GDP number isn’t available until late January 2025, signs indicate the economy is still moving in a positive direction and is on pace for another year of more than 2% growth.
“Unless we see a significant change to the labor market, or in spending, or in availability of capital, it’s hard to see the economy slowing to any great extent,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
According to the U.S. Bureau of Economic Analysis, the third quarter’s upward GDP adjustment to 3.1% was primarily the result of stronger consumer spending. Typically, consumers impact at least two-thirds of U.S. economic activity, and throughout 2024, they have been active participants. Consumer spending contributed nearly 2.5% to third quarter GDP growth. Spending on goods has increased steadily throughout the year.1 Higher government spending was the next largest contributing factor, with gross private domestic investment also making a positive contribution.
A key question now is whether consumers can maintain spending levels to the extent necessary to keep the economy growing. “Unless we see a significant change to the labor market, or in spending, or in availability of capital, it’s hard to see the economy slowing to any great extent,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “The current pace of economic growth is driven in large part by what has been a stable rate of wage growth, in the 4% range, for an extended period of time.”
Heading into 2025, there are a variety of factors that could alter the economy’s direction. After its last 2024 policymaking meeting, the Federal Reserve (Fed), which cut the short-term federal funds target rate by 1.00% from September through December 2024, indicated it was scaling back 2025 rate cutting plans. Instead of the previously projected four rate cuts, the Fed trimmed its expectations back to two rate cuts.2
“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.”
Inflation’s stickiness may be one of the Fed’s concerns. While inflation dropped from a peak of 9.2% in mid-2022 to 3% in June 2023, it has hovered in the 2.5% to 3.7% range since. In November 2024, inflation for the previous 12-month period stood at 2.7%.3
Markets are also closely watching how the new Trump administration's policies could impact the underlying economic environment. As a candidate, President-Elect Donald Trump emphasized plans to expand tariffs on foreign goods imported into the U.S., and the mass deportation of undocumented immigrants. “Tariffs could add to pricing pressures for consumers and businesses,” says Haworth, “and an immigration crackdown could reduce the workforce, possibly driving wages higher.” However, Haworth says markets are still in a wait-and-see mode since no specific policies are yet in place.
The economy’s ongoing strength helped corporations meet or exceed earnings expectations, fueling further stock market gains. While stocks lost ground on December 18, 2024, when the Fed announced its scaled-back rate cutting plans, the S&P 500 is still on pace for its second consecutive year of 20%+ gains.4
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 generated gains on the artificial intelligence investment boom, which may slow.”
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
After the slowest year for existing home sales in nearly 30 years last year, the housing market is still struggling to escape the doldrums.
After being inverted for much of the last two years, the yield curve is flattening across Treasury securities of varying maturities.
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