Economic Update: A Review of Fourth Quarter 2025

U.S. Economy

According to the Bureau of Economic Analysis, U.S. GDP grew at an annualized rate of 4.3% during the third quarter, following an increase of 3.8% in the second. The growth was primarily attributed to faster consumer spending, an upturn in exports and higher government spending. This was partly offset by a decrease in business investment. Corporate profits were also strong, rising $166.1 billion during the period as compared to the quarter before.

This economic momentum continued through the fourth quarter. As of this writing, the Federal Reserve Bank of Atlanta predicts 5.4% growth for the period. However, the recent government shutdown has impacted data gathering, so there could be some later revisions as the data gaps are filled.

Inflation may be moderating, as the Bureau of Labor Statistics reported that the Consumer Price Index rose 2.7% year over year in November 2025, with core CPI up only 2.6% for the prior twelve months. Data is a little spotty due to the recent shutdown, however, so it is best to wait another month before drawing a definitive conclusion. Regardless, we remain above the Federal Reserve’s 2% inflation target.

The labor market continued to show signs of softening this past quarter. The unemployment rate was 4.5% in December. The pace of job creation has dropped noticeably in the second half of the year, as only 50,000 new jobs were added in December. A total of 584,000 jobs were created for the full year, which represents the weakest year for job growth since 2003. 

The Federal Reserve has a dual mandate: maintaining price stability and achieving maximum employment. In its December meeting, the Fed cut the federal funds target range by 25 basis points to 3.50% to 3.75%, believing employment risks to be more pressing than inflation risks at this time. This was the third cut of 2025. The vote was 9 to 3, with two members preferring no change and one preferring a 50bp cut. This represents an unusually high level of dissent from the Fed that underscores internal uncertainty. 

There has been a marked difference in activity between the manufacturing and services sectors of our economy this past year. The ISM Manufacturing PMI fell to 47.9 in December 2025, marking the 10th consecutive month of contraction and the lowest reading since October 2024. By contrast, the services side shows expansion. ISM Services PMI registered 54.4 in December, its highest reading of the year. Readings over 50.0 indicate future economic expansion, while readings under 50.0 portend future contraction.  

International Economy

The IMF’s October 2025 World Economic Outlook described a world economy “in flux,” with near-term prospects limited relative to the strong growth experienced in the two decades preceding the pandemic. It projects global GDP growth of 2.9% in both 2025 and 2026, highlighting tariff-related headwinds, weaker confidence, and tighter financial conditions. 

Trade has swung from a strong first half of 2025, supported by front-loading in anticipation of tariffs, to a weaker second half as policy uncertainty persisted. In October, the WTO raised its 2025 trade volume growth to 2.4% but warned 2026 might slow sharply as the full-year tariff impact comes into effect. 

The Euro area exited 2025 on a somewhat firmer footing as compared to the beginning of the year: The ECB last cut rates in June 2025, expecting headline inflation to be 2.1% in 2025 and 1.9% in 2026, which is very close to its long-term 2% target. 

Once a growth engine for the world economy, China is now facing deflationary pressures and a slowdown in consumer confidence. Ongoing problems in the real estate sector and an aging population are contributing to economic uncertainty. In its December 2025 China Economic Update, the World Bank estimates GDP growth of 4.9% during 2025 and 4.4% during 2026. 

Markets

The U.S. stock market continued to perform well during the fourth quarter 2025. U.S. large-cap equities, as represented by the S&P 500 Index, gained 2.66% during the quarter. That index finished the year up 17.88%. Developed international equity markets, as represented by the MSCI EAFE Index, also posted a strong quarter, finishing with 4.86% gains and an increase of 31.22% for the year. The MSCI Emerging Markets Index also posted positive performance, with an increase of 4.73% at quarter-end and 33.57% during calendar 2025.

Bond returns were also positive. During the fourth quarter, the Bloomberg U.S. Aggregate Bond Index was up 1.10%, the Bloomberg Hedged Global Aggregate Bond Index was up 0.78% and the Bloomberg U.S. Inflation-Linked Bond Index was up 0.13%. Year to date, they finished up 7.30%, 4.86% and 7.01%, respectively. 

Commodities also performed well during the quarter. The Bloomberg Commodity Index gained 5.85% during the period, finishing the year up 15.77%. Real Estate did not fare as well, however. The Wilshire REIT Index was down 1.69% for the quarter but it did finish the year up 2.71% overall.

Outlook

Market performance from last year demonstrated the value of holding diversified assets. The U.S. stock market has been so strong over the last few years that it has been tempting for investors to steer an outsized portion of their investments into the U.S. while avoiding the rest of the world. However, international stocks in both developed and emerging markets decidedly outperformed last year and still look relatively attractive from a valuation perspective. 

At this point it is still uncertain as to what the economic impact of the recent U.S. action in Venezuela will be. At approximately 1 million barrels of daily oil production, the country represents about 1% of total world output today. Therefore, near-term supply disruption will likely be minor. In the long run there could be increased production if the current facilities are modernized. Alternatively, the country could be facing years of instability instead.  

Current U.S. stock market valuation may look a little stretched, but it has been backed by strong investment and earnings growth, particularly from the technology sector. As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon.