Consumers may be tapping the brakes on their spending
The outlook for the U.S. economy took a hit recently—and investors will be watching carefully to see where conditions go from here.
Over the past two years, actual gross domestic product (GDP) growth has averaged roughly 3%. However, the latest reading from the Atlanta Federal Reserve suggests negative GDP growth of -2.8% in the first quarter of 2025 (see the chart). That’s the Atlanta Fed’s worst economic outlook since the huge ups and downs in economic data caused by the Covid pandemic.
Atlanta Fed Running Estimates for U.S. Economic Growth
Source: Bloomberg, calculations by Horizon Investments, data as of 03/03/2025.
Before you hit the panic button, consider this key fact: The Atlanta Fed’s estimates are based on its GDPNow tool, which generates real-time growth projections based on each new economic report as it’s released. As seen in the chart, that means the growth estimates can swing wildly in both directions over short periods depending on what the latest economic reports are saying. In particular, note that GDPNow’s troubling estimate for negative growth in mid-2022 was a false signal.
Still, it’s important to recognize why GDPNow has dropped into negative territory. The shift was fueled mainly by news that the U.S. trade deficit surged in January—with foreign imports far outpacing exports in the wake of President Trump’s tariff threats against Mexico, China and Canada. While that imbalance may be temporary, there are other signs that the U.S. consumer is becoming worried about the future. For example:
- Consumer confidence dropped in February at its sharpest rate since August 2021, reaching its lowest level in eight months, according to the Conference Board.
- Consumers cut their spending in January by the most since February 2021, according to the U.S. Commerce Dept.
The good news: Incomes rose significantly more than expected in January with 0.9% growth vs. 0.4% expected, bringing the year-over-year growth to 4.6%—suggesting consumers still have plenty of spending power.
Since consumer spending accounts for two-thirds of GDP, we’re closely monitoring these metrics to see how they evolve. We believe consumers are feeling uncertain amidst the volatile financial markets. Being aware of the growing risks and considering strategies to mitigate them if conditions deteriorate could be a practical approach for many goals-based investors.
