Driven by consumer spending and productivity, the economy had very solid growth in 2025, particularly in the second half of the year. However, the labor market is clearly cooling. Job growth has slowed materially, and unemployment has drifted higher. Artificial intelligence, automation, and capital-intensive investment are boosting output without the need for increased hiring. GDP growth has been strong, surprising many experts who are forecasting a recession in 2025. This mix of growth, labor, and policy uncertainty is somewhat unusual.

The Impact of Inflation

Headline inflation has moderated, especially relative to what we saw back in 2021 and 2022. Latest numbers show 2.7% for headline inflation in 2025 and 2.6% inflation for core inflation, which excludes the more volatile sectors of food and energy. Productivity-led growth helps explain why inflation is easing, even as growth stays firm.

The Fed has begun cutting rates, but their tone is cautious about the prospect of future rate cuts. With that said, the market is actually expecting more cuts than what the Fed is signaling, which does create some risk around future data surprises.

Additional Dangers

Further deterioration of the labor market should also be carefully monitored. Slowing job growth, rising unemployment, high fiscal deficits, and the potential for rising long-term interest rates could all pose risks to the economic outlook.

Consumer Confidence

Consumer confidence remains a relatively weak spot for the economy. So even though we’ve seen strong GDP growth, consumer confidence and their outlook for the future of the economy has remained relatively weak. That’s important because one of the things that’s been supporting the strong GDP growth in 2025 was consumer spending; seeing a pullback from the consumer could affect the outlook as well.

Conclusion

In short, stronger job growth is needed to sustain the economy, and investors are best served by staying diversified, rebalancing, and sticking to their long‑term plan. We remain focused on building well-protected portfolios that can hold up across multiple scenarios and economic environments. If you have any questions, please don’t hesitate to reach out to your advisor.

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