Notes on the Economy – Q1 2025 Summary

MUDDY WATERS

Growth in U.S. real GDP decelerated in the fourth quarter of 2024. After growing an annualized 3.1% in the third quarter and 3.0% in the second quarter, the advance estimate for the fourth quarter’s growth came in at 2.3%. The second- and third-quarter growth rates were well above consensus forecasts, as well as expert estimates for the economy’s longer-run growth potential.

The fourth quarter’s result is much closer to the central tendency of recent expert forecasts for current quarterly growth, as well as for longer-run real GDP growth potential. Even so, recent key data are muddy—that is, contradictory and questionable. For example, fourth quarter growth was driven by consumer spending and its annualized 12.1% increase in sales of durable goods. Also, the January employment report revealed a data revision that reduced the estimated number of jobs by over 600,000, and net job additions fell to 143,000 from 307,000 in December. Yet, the unemployment rate ticked down from 4.1% to 4.0%.

Economic growth momentum in the global economy remains moderately positive. The global Composite Purchasing Managers’ Index (PMI), for example, eased a bit in January. Even so, it registered 51.8, which is above the breakeven line of 50.0 between contraction and expansion. The main support came from services; the Global Services PMI was 52.2 in January. The Global Manufacturing PMI was up 0.5 points from December, putting it at 50.1 and suggesting that the slump in global manufacturing may be coming to an end.

HEADLINES – What’s important

1. Inflation Is Proving Stubborn – Still, inflation should decrease in the coming months, helped by favorable statistical base effects and by slowing growth in the cost of shelter.
2. The Fed’s Rate-Cut Cycle Is on Temporary Hold – The Federal Reserve (Fed) is trying to balance the risk of a too tight policy that adversely affects employment, against a too easy policy that reignites inflation. Although the Fed will be cautious, a few additional cuts are likely by mid-2026.
3. Treasurys Can Be a Safe Haven – Fixed income securities offer positive return prospects despite inflation fears. Treasury bonds can play a safe-haven role within an investment portfolio.
4. Equity Market Sentiment Is Near a Bullish Extreme – But potential economic outcomes for 2025 are varied and uncertain. Investors should hold steady for now, focusing on U.S. domestic small- and mid-caps as relatively cheap monetary and fiscal policy beneficiaries.

LOOKING AHEAD

The U.S. economy is transitioning from a growth spurt well in excess of the economy’s long-run potential to a period of normalcy. Blow-out household spending on durables, which has driven growth for the last three quarters, simply cannot last forever. Growth of spending has outpaced that of disposable income. Savings rates are falling while use of debt for consumption items is up, and delinquencies for auto loans and credit cards are at their highest levels since the Great Financial Crisis.

Fortunately, high household net worth and still-low aggregate household debt service requirements are a positive offset. Interest rates are not at a restrictive level, and the Fed is more likely to cut than to raise the federal funds rate over the coming year. Also, comprehensive survey data suggest that the U.S. economy remains on a growth path in early 2025. For example, in January, the U.S. Composite Output PMI compiled by S&P Global was 52.4, the Manufacturing PMI was 51.2, and the Services PMI 52.9.

The nearly universal shift in global monetary and fiscal policies during 2024 toward an accommodative stance for economic growth has had a positive effect. It appears likely that moderate global economic growth will be sustained through 2025 and 2026. The International Monetary Fund’s (IMF) January forecasts put global real GDP on track to expand 3.3% in both 2025 and 2026. Advanced economies are expected to advance just under 2.0% and emerging and developing economies around 4.2%.

* The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of February 19, 2025.

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