Cracks emerging behind economic strength
Entering 2025, the U.S. economy continues to demonstrate strength and resilience. In the fourth quarter of 2024, real gross domestic product (GDP) grew at an annualized rate of 2.3%, according to the U.S. Bureau of Economic Analysis (BEA).
The BEA attributed growth in the quarter primarily to increased consumer and government spending. A decline in investment, however, partially offset these gains. For calendar year 2024, real GDP grew by an impressive 2.8%, a slight drop-off from the 2.9% growth recorded in 2023.
Following the 2024 elections, corporate America saw opportunities ahead. The Conference Board Measure of CEO Confidence rose to 60 in the first quarter of 2025, its highest level in three years, based on a survey of 134 CEOs conducted from January 27 through February 10 (see Figure 1). Notably:
of CEOs said they planned to grow or maintain the size of their workforces over the next 12 months.
of CEOs said they expect economic conditions to improve over the next six months.
said they expect short-term prospects in their industries to improve over the next six months.
The Conference Board described the shift in executive views from the fourth quarter of 2024 as moving “from cautious optimism to confident optimism.” But several weeks have passed since The Conference Board’s survey was executed — and fears of a recession are reemerging as tariffs roil financial markets.
Consumers have a far more pessimistic view than the C-suite. In February, the Conference Board Consumer Confidence Index saw its largest monthly decline since August 2021, falling for the third consecutive month.
Growing debt is contributing to the American consumer’s growing sense of exhaustion. Total household debt topped $18 trillion in the fourth quarter of 2024, according to the Federal Reserve Bank of New York, and the share of active credit cards making only the minimum payment reached a 12-year high in the third quarter, according to the Federal Reserve Bank of Philadelphia. Outstanding student loan debt grew to $1.62 trillion in the fourth quarter, according to the New York Fed.
The most significant factor weighing on consumers, however, is inflation, a key determinant of economic growth that has proven to be a stubborn challenge for policymakers.
In February, “headline” inflation — as measured by the U.S. Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI) — rose 2.8% from the previous year, a slight improvement from the 3.0% year-over-year increase recorded in January (see Figure 2). “Core” inflation, which excludes food and energy costs, rose 3.1% in February, down from 3.3% in January.
On one hand, this data highlights that inflation has eased considerably from relatively recent peaks — 9.1% for headline inflation in June 2022 and 6.6% for core inflation in September 2022. On the other hand, policymakers’ progress in containing price increases has slowed since mid-2023. Moreover, headline inflation of 2.8% is still well above the Federal Reserve’s target of 2%.
The labor market, meanwhile, has shown surprising durability after appearing to cool in mid-2024. According to the BLS, employers added 125,000 nonfarm jobs in January and 151,000 jobs in February after larger-than-expected gains of 261,000 and 323,000 in November and December, respectively — fewer new jobs than anticipated, but still respectable totals (see Figure 3). The unemployment rate inched up to 4.1% in February from 4.0% in January.
Anticipating continued progress against inflation in 2025, the Fed elected in the second half of 2024 to cut interest rates three times, by 100 basis points in total. But recent developments — including inflation’s intractability, the labor market’s surprising resilience, concern about tariffs, and overall economic uncertainty — have led the Fed to signal an indefinite pause on future rate cuts.
In written testimony submitted to the Senate Committee on Banking, Housing, and Urban Affairs before a February 12 hearing, Fed Chair Jerome Powell acknowledged the tightrope the Fed must walk. “Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people… We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.”
Interestingly, despite concerns some economic observers have expressed about its resurgence of late, “The labor market is not a source of significant inflationary pressures,” Powell said. “Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance.”
Minutes from the Federal Open Market Committee’s January 28-29 meeting highlight “other factors… having the potential to hinder the disinflation process, including the effects of potential changes in trade and immigration policy as well as strong consumer demand. Business contacts in a number of Districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs.”
Some recent activity suggests reasons for additional concern. For one, financial markets have been shaken by recent uncertainty, particularly around tariffs. From Election Day through February 19, 2025, the S&P 500 rose 361.39 points, reflecting investors’ optimism as President Trump returned to the White House. But as the administration repeatedly switched between moving forward with and then pausing tariffs on Canada and Mexico, the index fell 469.03 points over just 18 trading days through March 17.
Recent stock market swings have eroded the wealth effect among the top 1% of Americans, who drive a significant share of discretionary spending. Wavering confidence among this group could eat into consumption, investments, and broader economic activity.
Following its most recent March 18-19 meeting, the FOMC revised its projection of real GDP growth for 2025 downward, to 1.8%; in December, the FOMC had projected 2.1% growth. The committee also projects real GDP growth of 1.8% in both 2026 and 2027.
