Executive Summary
Why is the US economy so strong? Look in the mirror: The consumer is the engine of growth. Yes, technological advancements will continue to buoy GDP, as will Trump 2.0 deregulation and lower taxes. But consumer spending accounts for nearly 70% of real GDP. We reject the notion that consumer spending will slow in the face of depleted saving and other drags; it’s too resilient, which is why the economy is so resilient. Likewise, we don’t expect capital spending to slow notwithstanding a weak Q4; companies still have much to gain from investments in AI and other technological innovations. That’s the linchpin of our productivity-led Roaring 2020s outlook (55% odds) and higher S&P 500 price targets for the rest of the decade. … Check out the accompanying chart collection.
US Economy I: The Year of the Consumer
The American economy put up impressive numbers in 2024. Much of the financial media chatter has focused on the advent of artificial intelligence (AI) and Trump 2.0. But lost in hullabaloo is the fact that the US consumer is powering the economy to new heights. We expect that the consumer will continue to do so in 2025.
We are big believers that improvements in automation, robotics, and data processing (i.e., AI and quantum computing) will continue to boost worker productivity, alleviate high-skilled labor shortages, and stimulate capital spending. We are also Trump 2.0 bulls, expecting deregulation and lower taxes to fuel more domestic investment, hiring, and consumption.
However, the strength of the consumer is the engine of economic growth. Indeed, personal consumption expenditures on goods (21.4%) and services (46.8%) make up 68.2% of US nominal GDP.
▌View Related Live Charts: US - GDP by Component (% of GDP)
Many hard-landers who had been calling for a recession over the past three years have thrown in the towel. But even more people now seem to be expecting an economic slowdown this year. The pervasive pessimism hinges on the consumer, specifically the prospect that consumer spending will slow as the result of weakening hiring, rising consumer credit delinquencies, depleted saving, and perhaps deportations.
Even if the consumer doesn’t buckle, Trump 2.0 trade wars might cause a recession after all. US export industries might suffer as America’s trading partners retaliate. American consumers and businesses will have to pay more for imported goods, parts, and materials. Tariffs are taxes, which could depress economic growth. But considering that the economy withstood the most rapid Federal Reserve tightening cycle in four decades without a slowdown, we are optimistic about its resilience to shocks.
Our base-case outlook remains our technology-driven, productivity-led Roaring 2020s scenario, with a 55% subjective probability. As a result, it’s more than likely that the current bull market in stocks is not nearing its final inning, nor even the seventh inning stretch. Our S&P 500 price targets of 7000 by year-end 2025, 8000 by the end of 2026, and 10,000 by the end of the decade remain intact.
Here's more on the sources of last year’s GDP growth and what we expect this year:
(1) New records
Last year, real GDP rose 2.8% to yet another record high of $23.5 trillion (saar), increasing 2.3% q/q (saar) in Q4. The quarterly slowdown in headline GDP growth from Q3’s 3.1% was largely due to volatile inventory investment. Importantly, real personal consumption expenditures (PCE) rose to a new record high, reaching $16.3 trillion after growing 4.2% (saar) in Q4 and 2.8% for the whole of 2024. That was the highest quarterly growth since Q1-2023 and up from 1.9% in Q1-2024. Real consumer spending on both goods and services rose to record highs last quarter.
▌View Related Live Charts: US - Real GDP, US - Real GDP - Consumption (SAAR), US - Real Private Nonresidential Fixed Investment
▌View Related Live Charts: US - Real Personal Consumption Expenditures - Services (SAAR), US - Real Personal Consumption Expenditures - Goods (SAAR)
(2) Goods boom
Real consumer spending on goods jumped 6.6% q/q (saar) during Q4, led by a 12.1% leap in durable goods purchases. Perhaps some of the increase stemmed from consumers’ front-running potential tariffs. More likely, it was driven by year-end incentives that boosted auto sales. However, we note that durable goods consumption had been accelerating throughout the year. After falling 1.8% in Q1, real durable goods PCE increased 5.5%, 7.6%, and 6.6% in Q2, Q3, and Q4, respectively, to a new record high.
Demand for goods, especially durables like autos and appliances, surged during the pandemic. So consumer demand that goods producers normally would have seen in 2022 and 2023 was pulled forward into 2020 and 2021. But consumers were back buying briskly during 2024 despite higher interest rates. This is one sign that higher-for-longer (or, in our view, normal-for-longer) interest rates won’t slow consumers’ purchasing of big-ticket items.
One tailwind for goods consumption has been deflation. PCED durable goods prices fell 1.1% y/y in December and have been falling since June 2023. However, nondurables prices are starting to increase, and durable goods prices are likely to follow. That's even before the Trump administration’s tariffs take effect. Goods inflation will weigh on inflation-adjusted real consumption. The question is how much rising prices impact demand. As of now, we aren’t expecting overall demand to decrease meaningfully. Still, a negative hit to growth from trade wars is in our “what could go wrong” bucket, to which we currently assign a 20% subjective probability.
(3) Incomes rising on all cylinders
Driving consumer spending has been real income growth. In December, disposable personal income (DPI) rose 5.0% y/y to a new record high of $22.1 trillion (saar). In real terms, DPI rose 2.4% y/y in December and has been increasing at roughly its pre-pandemic pace, if not a bit faster.
▌View Related Live Charts: US - Disposable Personal Income (SAAR), US - Real Disposable Personal Income (SAAR)
The historically tight labor market and rising productivity have fueled real wage gains, particularly for lower-wage workers, who represent roughly four-fifths of US employment. Their nominal wage gains have been outpacing inflation for nearly two years after stagnating for much of the early-to-mid 2010s.
▌View Related Live Charts: US - Average Hourly Earnings, US - Average Hourly Earnings - Wage Level Lowest Quarters(YoY), US - Average Hourly Earnings - Wage Level Top Quarters(YoY)
While the overall labor market has been red hot, the white-collar job market was much cooler over the past few years. Inflation eroded the wages and salaries of higher-wage workers for much of the post-pandemic period. Now, their real income growth is accelerating rapidly.
While higher-wage workers’ real wages fell during the pandemic, rising nonlabor income and a huge wealth effect from rapidly rising stock and home prices more than offset that. Interest, dividend, rental, and proprietors’ incomes all have risen to record highs, totaling $7.1 trillion (saar) in December.
Nonlabor income has been a boon, particularly to the retiring Baby Boomers and high-income households, as have rising asset prices. A reduced need to save leaves even more after-tax income to be spent. That’s one reason that the savings rate is down to 3.8% as of December. We expect it to turn negative over the remainder of this decade as retirees continue to spend without the benefit of any labor income.
▌View Related Live Charts: US - Personal Saving Rate
Slowing immigration is likely to weigh on the growth rates of the labor force and technology-led productivity enhancers may and aggregate weekly hours. So it’s likely that real average hourly earnings growth and the wealth effect will be the main drivers of consumer spending over the next few years.
▌View Related Live Charts: US - Average Weekly Hours - Private Service-Providing (YoY)
▌View Related Live Charts: US - Personal Income - Wages and Salaries (SAAR), US - Retail Sales - Food Services & Drinking Places, US - PCE Price Index - Goods (MoM)
US Economy II: Investment Slowdown?
While last year was a bright one for business capital spending, it finished with a whimper rather than a bang. For much of 2023 and 2024, government incentives and real business needs sparked a boom in nonresidential fixed investment, particularly in high-tech sectors and construction of manufacturing facilities. The weakness in Q4 was an anomaly in this respect, but we don’t expect it to be the start of a trend.
Technological innovation, of course, is a linchpin of our Roaring 2020s scenario, and we expect areas like software and research and development (R&D) to continue growing into a bigger part of the overall economy. The pro-tech, pro-business stance of Trump 2.0 and real demand for AI will continue to drive the high-tech investment boom that now accounts for more than half of US capital spending.
While the Mangificent-7 tech companies will continue to shell out cash for new AI- and energy-related projects, the rate of growth for that spending may slow this year and next. However, we believe that slowing capex growth by the Mag-7 will be offset by hastening of the S&P 493’s collective investments in technology to augment the productivity of their workforces. Eventually, even small- and medium-sized businesses will be investing in AI-enabled products to increase productivity and efficiency. No doubt, venture capital and private equity firms will implement these technologies across their portfolio companies to boost profit margins.
Here’s more on the capital investment front:
(1) Temporary weakness in Q4
Overall economic growth was strong during Q4. Real final sales, which excludes business inventory investment, rose 3.2% q/q (saar) in Q4. Real private domestic demand—the Fed’s preferred measure of core real GDP, which excludes federal spending, business inventory investment, and trade—also rose 3.2%. However, these were mostly consumer driven. Real business investment rose just 1.5% q/q (saar) in Q4 and 1.7% for the whole year. Though it did reach a record high of $3.5 trillion (saar), annual growth was down from 3.2% in 2023 and 7.8% in 2022.
▌View Related Live Charts: US - Real Private Nonresidential Fixed Investment
Intellectual property (IP)—which includes software, research and development (R&D), and entertainment, literary, and artistic originals—rose 2.6% q/q (saar) to a new high of $1.5 trillion. However, annual growth was down from 5.8% in 2023 to 4.1% in 2024.
Capital equipment investment fell 7.8% q/q (saar), its worst quarter since the pandemic. On a y/y basis, it slowed marginally from 3.5% to 3.4%. However, we expect equipment investment to rebound this quarter as information processing equipment reaches a new record high alongside R&D and software investment.
(2) Volatile inventories
Slower private inventories investment reduced real GDP growth by 0.93ppt in Q4 after dragging it down in Q1, largely due to inventory drawdowns by wholesalers and auto dealers. We expect inventory investment to rebound during the first half of this year.
▌View Related Live Charts: US - Contribution to Real GDP Growth by Component
US Economy III: Trade Wars & DOGE
On Saturday, President Trump imposed tariffs of 25% on imports from Canada and Mexico. Chinese imports were slapped with an additional 10% tariff. These developments are bound to weigh on US economic growth unless trade negotiations between the US and these three trading partners move quickly to reverse the tariffs. Also weighing on the economy might be the Trump administrations moves to cut government spending through executive orders and the efforts of the Department of Government Efficiency (DOGE).
(1) Trade wars could weaken global economic growth
The US trade deficit impacted Q4’s GDP growth only minimally, but naturally it will be highly topical this year. Trade is not a large portion of US nominal GDP but invariably is interconnected with intermediate prices, labor costs, and the revenues of domestic producers. Given our optimistic outlook for the US consumer—especially relative to Chinese and European consumers—we do not expect tariffs to significantly reduce the trade deficit, which stood at $1.3 trillion (saar) in Q4.
▌View Related Live Charts: US - Exports vs. Imports, US - Real GDP - Imports of Goods and Services, US - Real GDP - Exports of Goods and Services
YRI’s real global growth proxy accelerated to 3.8% y/y in Q4. It is simply the sum of real US exports and imports. It is currently growing about as fast as just before Trump 1.0 tariffs turned its growth rate negative in 2019. Trump 2.0 tariffs could turn it negative again.
▌View Related Live Charts: US - Trade Balance
(2) Government spending slowdown Even if the Department of Government Efficiency (DOGE) manages to cut federal spending and therefore weigh on real GDP growth, we expect businesses and consumers will fill the gap. Deregulation and lower tax rates are likely to spur more hiring and investment in an economy already at full employment. That should drive increased productivity growth and real wage gains.
Executive Summary
Why is the US economy so strong? Look in the mirror: The consumer is the engine of growth. Yes, technological advancements will continue to buoy GDP, as will Trump 2.0 deregulation and lower taxes. But consumer spending accounts for nearly 70% of real GDP. We reject the notion that consumer spending will slow in the face of depleted saving and other drags; it’s too resilient, which is why the economy is so resilient. Likewise, we don’t expect capital spending to slow notwithstanding a weak Q4; companies still have much to gain from investments in AI and other technological innovations. That’s the linchpin of our productivity-led Roaring 2020s outlook (55% odds) and higher S&P 500 price targets for the rest of the decade. … Check out the accompanying chart collection.
US Economy I: The Year of the Consumer
The American economy put up impressive numbers in 2024. Much of the financial media chatter has focused on the advent of artificial intelligence (AI) and Trump 2.0. But lost in hullabaloo is the fact that the US consumer is powering the economy to new heights. We expect that the consumer will continue to do so in 2025.
We are big believers that improvements in automation, robotics, and data processing (i.e., AI and quantum computing) will continue to boost worker productivity, alleviate high-skilled labor shortages, and stimulate capital spending. We are also Trump 2.0 bulls, expecting deregulation and lower taxes to fuel more domestic investment, hiring, and consumption.
However, the strength of the consumer is the engine of economic growth. Indeed, personal consumption expenditures on goods (21.4%) and services (46.8%) make up 68.2% of US nominal GDP.
▌View Related Live Charts: US - GDP by Component (% of GDP)
Many hard-landers who had been calling for a recession over the past three years have thrown in the towel. But even more people now seem to be expecting an economic slowdown this year. The pervasive pessimism hinges on the consumer, specifically the prospect that consumer spending will slow as the result of weakening hiring, rising consumer credit delinquencies, depleted saving, and perhaps deportations.
Even if the consumer doesn’t buckle, Trump 2.0 trade wars might cause a recession after all. US export industries might suffer as America’s trading partners retaliate. American consumers and businesses will have to pay more for imported goods, parts, and materials. Tariffs are taxes, which could depress economic growth. But considering that the economy withstood the most rapid Federal Reserve tightening cycle in four decades without a slowdown, we are optimistic about its resilience to shocks.
Our base-case outlook remains our technology-driven, productivity-led Roaring 2020s scenario, with a 55% subjective probability. As a result, it’s more than likely that the current bull market in stocks is not nearing its final inning, nor even the seventh inning stretch. Our S&P 500 price targets of 7000 by year-end 2025, 8000 by the end of 2026, and 10,000 by the end of the decade remain intact.
Here's more on the sources of last year’s GDP growth and what we expect this year:
(1) New records
Last year, real GDP rose 2.8% to yet another record high of $23.5 trillion (saar), increasing 2.3% q/q (saar) in Q4. The quarterly slowdown in headline GDP growth from Q3’s 3.1% was largely due to volatile inventory investment. Importantly, real personal consumption expenditures (PCE) rose to a new record high, reaching $16.3 trillion after growing 4.2% (saar) in Q4 and 2.8% for the whole of 2024. That was the highest quarterly growth since Q1-2023 and up from 1.9% in Q1-2024. Real consumer spending on both goods and services rose to record highs last quarter.
▌View Related Live Charts: US - Real GDP, US - Real GDP - Consumption (SAAR), US - Real Private Nonresidential Fixed Investment
▌View Related Live Charts: US - Real Personal Consumption Expenditures - Services (SAAR), US - Real Personal Consumption Expenditures - Goods (SAAR)
(2) Goods boom
Real consumer spending on goods jumped 6.6% q/q (saar) during Q4, led by a 12.1% leap in durable goods purchases. Perhaps some of the increase stemmed from consumers’ front-running potential tariffs. More likely, it was driven by year-end incentives that boosted auto sales. However, we note that durable goods consumption had been accelerating throughout the year. After falling 1.8% in Q1, real durable goods PCE increased 5.5%, 7.6%, and 6.6% in Q2, Q3, and Q4, respectively, to a new record high.
Demand for goods, especially durables like autos and appliances, surged during the pandemic. So consumer demand that goods producers normally would have seen in 2022 and 2023 was pulled forward into 2020 and 2021. But consumers were back buying briskly during 2024 despite higher interest rates. This is one sign that higher-for-longer (or, in our view, normal-for-longer) interest rates won’t slow consumers’ purchasing of big-ticket items.
One tailwind for goods consumption has been deflation. PCED durable goods prices fell 1.1% y/y in December and have been falling since June 2023. However, nondurables prices are starting to increase, and durable goods prices are likely to follow. That's even before the Trump administration’s tariffs take effect. Goods inflation will weigh on inflation-adjusted real consumption. The question is how much rising prices impact demand. As of now, we aren’t expecting overall demand to decrease meaningfully. Still, a negative hit to growth from trade wars is in our “what could go wrong” bucket, to which we currently assign a 20% subjective probability.
(3) Incomes rising on all cylinders
Driving consumer spending has been real income growth. In December, disposable personal income (DPI) rose 5.0% y/y to a new record high of $22.1 trillion (saar). In real terms, DPI rose 2.4% y/y in December and has been increasing at roughly its pre-pandemic pace, if not a bit faster.
▌View Related Live Charts: US - Disposable Personal Income (SAAR), US - Real Disposable Personal Income (SAAR)
The historically tight labor market and rising productivity have fueled real wage gains, particularly for lower-wage workers, who represent roughly four-fifths of US employment. Their nominal wage gains have been outpacing inflation for nearly two years after stagnating for much of the early-to-mid 2010s.
▌View Related Live Charts: US - Average Hourly Earnings, US - Average Hourly Earnings - Wage Level Lowest Quarters(YoY), US - Average Hourly Earnings - Wage Level Top Quarters(YoY)
While the overall labor market has been red hot, the white-collar job market was much cooler over the past few years. Inflation eroded the wages and salaries of higher-wage workers for much of the post-pandemic period. Now, their real income growth is accelerating rapidly.
While higher-wage workers’ real wages fell during the pandemic, rising nonlabor income and a huge wealth effect from rapidly rising stock and home prices more than offset that. Interest, dividend, rental, and proprietors’ incomes all have risen to record highs, totaling $7.1 trillion (saar) in December.
Nonlabor income has been a boon, particularly to the retiring Baby Boomers and high-income households, as have rising asset prices. A reduced need to save leaves even more after-tax income to be spent. That’s one reason that the savings rate is down to 3.8% as of December. We expect it to turn negative over the remainder of this decade as retirees continue to spend without the benefit of any labor income.
▌View Related Live Charts: US - Personal Saving Rate
Slowing immigration is likely to weigh on the growth rates of the labor force and technology-led productivity enhancers may and aggregate weekly hours. So it’s likely that real average hourly earnings growth and the wealth effect will be the main drivers of consumer spending over the next few years.
▌View Related Live Charts: US - Average Weekly Hours - Private Service-Providing (YoY)
▌View Related Live Charts: US - Personal Income - Wages and Salaries (SAAR), US - Retail Sales - Food Services & Drinking Places, US - PCE Price Index - Goods (MoM)
US Economy II: Investment Slowdown?
While last year was a bright one for business capital spending, it finished with a whimper rather than a bang. For much of 2023 and 2024, government incentives and real business needs sparked a boom in nonresidential fixed investment, particularly in high-tech sectors and construction of manufacturing facilities. The weakness in Q4 was an anomaly in this respect, but we don’t expect it to be the start of a trend.
Technological innovation, of course, is a linchpin of our Roaring 2020s scenario, and we expect areas like software and research and development (R&D) to continue growing into a bigger part of the overall economy. The pro-tech, pro-business stance of Trump 2.0 and real demand for AI will continue to drive the high-tech investment boom that now accounts for more than half of US capital spending.
While the Mangificent-7 tech companies will continue to shell out cash for new AI- and energy-related projects, the rate of growth for that spending may slow this year and next. However, we believe that slowing capex growth by the Mag-7 will be offset by hastening of the S&P 493’s collective investments in technology to augment the productivity of their workforces. Eventually, even small- and medium-sized businesses will be investing in AI-enabled products to increase productivity and efficiency. No doubt, venture capital and private equity firms will implement these technologies across their portfolio companies to boost profit margins.
Here’s more on the capital investment front:
(1) Temporary weakness in Q4
Overall economic growth was strong during Q4. Real final sales, which excludes business inventory investment, rose 3.2% q/q (saar) in Q4. Real private domestic demand—the Fed’s preferred measure of core real GDP, which excludes federal spending, business inventory investment, and trade—also rose 3.2%. However, these were mostly consumer driven. Real business investment rose just 1.5% q/q (saar) in Q4 and 1.7% for the whole year. Though it did reach a record high of $3.5 trillion (saar), annual growth was down from 3.2% in 2023 and 7.8% in 2022.
▌View Related Live Charts: US - Real Private Nonresidential Fixed Investment
Intellectual property (IP)—which includes software, research and development (R&D), and entertainment, literary, and artistic originals—rose 2.6% q/q (saar) to a new high of $1.5 trillion. However, annual growth was down from 5.8% in 2023 to 4.1% in 2024.
Capital equipment investment fell 7.8% q/q (saar), its worst quarter since the pandemic. On a y/y basis, it slowed marginally from 3.5% to 3.4%. However, we expect equipment investment to rebound this quarter as information processing equipment reaches a new record high alongside R&D and software investment.
(2) Volatile inventories
Slower private inventories investment reduced real GDP growth by 0.93ppt in Q4 after dragging it down in Q1, largely due to inventory drawdowns by wholesalers and auto dealers. We expect inventory investment to rebound during the first half of this year.
▌View Related Live Charts: US - Contribution to Real GDP Growth by Component
US Economy III: Trade Wars & DOGE
On Saturday, President Trump imposed tariffs of 25% on imports from Canada and Mexico. Chinese imports were slapped with an additional 10% tariff. These developments are bound to weigh on US economic growth unless trade negotiations between the US and these three trading partners move quickly to reverse the tariffs. Also weighing on the economy might be the Trump administrations moves to cut government spending through executive orders and the efforts of the Department of Government Efficiency (DOGE).
(1) Trade wars could weaken global economic growth
The US trade deficit impacted Q4’s GDP growth only minimally, but naturally it will be highly topical this year. Trade is not a large portion of US nominal GDP but invariably is interconnected with intermediate prices, labor costs, and the revenues of domestic producers. Given our optimistic outlook for the US consumer—especially relative to Chinese and European consumers—we do not expect tariffs to significantly reduce the trade deficit, which stood at $1.3 trillion (saar) in Q4.
▌View Related Live Charts: US - Exports vs. Imports, US - Real GDP - Imports of Goods and Services, US - Real GDP - Exports of Goods and Services
YRI’s real global growth proxy accelerated to 3.8% y/y in Q4. It is simply the sum of real US exports and imports. It is currently growing about as fast as just before Trump 1.0 tariffs turned its growth rate negative in 2019. Trump 2.0 tariffs could turn it negative again.
▌View Related Live Charts: US - Trade Balance
(2) Government spending slowdown Even if the Department of Government Efficiency (DOGE) manages to cut federal spending and therefore weigh on real GDP growth, we expect businesses and consumers will fill the gap. Deregulation and lower tax rates are likely to spur more hiring and investment in an economy already at full employment. That should drive increased productivity growth and real wage gains.
