Economic Outlook - December 2025
- The seven-week U.S. government shutdown ended on November 12. The lengthy shutdown negatively affected the general sentiment of the investment markets and held up the release of routine economic data. However, one newly released statistic raising concern is the consumers’ outlook. Sentiment continued its fall last month as shoppers worried about pressured personal finances, with higher food prices a particular concern. Tariffs on household staples like coffee, the shortage of beef cattle, and increased electric power rates have driven costs dramatically higher. The current University of Michigan Consumer Sentiment Index slid 2.6 points to 51, now down 29% from a year ago. Refined estimates of Q3 Gross Domestic Product (GDP) growth have been delayed, but estimates for this year are approximately $30.6 trillion, an increase of 2% over 2024. The forecast for 2026 anticipates sustained moderate growth between 1.7% and 2.2%.
- The average cost-of-living has become a significant issue for households of nearly all income levels. Large retailers, like Target and Walmart, have identified a rising affordability disparity between their customers at the low and high ends of household income. It may be that only the ultra-wealthy are sufficiently insulated from the issue. Another telltale sign of consumer stress is the 90-day auto loan delinquency rate, which has risen to about 5%, well above the long-term average of 3.5%. Overall delinquencies have risen to the highest levels since the Great Recession. Student loan debt is often cited as a primary cause of credit pressure. Despite the better than expected Black Friday sales with a 3% year-over-year bump, retailers are actively discounting to attract these stressed consumers.
- Following each of the previous two Federal Open Market Committee (FOMC) meetings, policymakers announced 25-basis point rate cuts. The benchmark rate, currently 3.75% to 4%, has come down 1.5% from its high point in 2024 through a series of five reductions. With headline unemployment in the mid-4% range, conditions seem likely to prompt an added drop, but an additional cut this month remains an open question while the FOMC debates whether a near-term easing will reaccelerate inflation. The Fed has referred to a weakening labor market as a factor that prompted lowering rates in previous meetings, but the Bureau of Labor Statistics recently announced that 119,000 jobs were created in September, about double the consensus predictions. Next year, Fed Chair Jerome Powell will be stepping down from the top post at the end of his term in May, handing the reins to a new Presidential appointee. The Fed’s dual-mandate of inflation control and full employment will remain challenging.
- New core capital goods orders have shrunk recently, signaling increased caution for longer-range business investment. Concurrently, American manufacturing has continued a nine-month long contraction, while import tariffs and a pause in government purchases compounded business difficulties. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) fell to a four-month low of 48.2% last month from 48.7% in October, a modest additional contraction. Conditions remain soft as a result of higher and less predictable expenses from tariffs, regional instabilities, the federal government shutdown, and increased global uncertainty.
Sources: FactSet, University of Michigan Surveys of Consumers, U.S. Bureau of Labor Statistics, International Monetary Fund, Federal Reserve Bank of New York, Institute for Supply Management (ISM)
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