There are multiple ways to track the health of the consumer, including sentiment and spending measures. Sentiment is important because it can be a driver of consumer spending habits, which directly impact gross domestic product (GDP). Over the last several months, consumer sentiment has wilted a bit, raising concerns about growth for some investors. Pessimism regarding labor market conditions and tariffs was partially at fault, while inflation fears intensified.
However, since President Trump won the election, expectations for potential business-friendly policies, such as tariffs on imports, a lower corporate tax rate and less regulation, have boosted small business confidence. Given that improving business confidence is highly correlated with the level of investment in critical areas such as factories and technology, a rebound could affect overall economic growth in a material way.
Our outlook on U.S. GDP growth remains positive for 2025, especially because we continue to expect robust consumer spending to persist, driven by a strong enough labor market and healthy balance sheets. We expect U.S. growth for 2025 to range from 1.5% to 2.5%, in line with trend growth, but a recovery in investment could lift growth even higher.
However, actual behavior, i.e., aggregate spending, remains stable, and we believe it tells a more compelling story. Inflation-adjusted personal consumption, which comprises 70% of GDP, grew 3.0% in January, down slightly from its 2024 peak of 3.2%. Importantly, it remains above its 2.7% average since 2023, underscoring the continued resilience of the consumer.
While we are watching for signs of further softening in spending, we believe the labor market and consumer balance sheets are good enough to keep the economy moving at a modest pace near the trend rate. Near-term policy uncertainty is negative for sentiment and adds downside risk to the growth outlook, but we believe new policies will be pro-growth, focused on bringing down Treasury yields and supportive of a strategic decoupling from China.
