December 2025 data painted a picture of an economy perhaps losing momentum, even as inflation pressures receded. Consumer confidence fell for a fifth straight month, reaching its lowest level since April 2025 when new tariffs dampened sentiment. In tandem, the job market showed further signs of cooling – the unemployment rate hit 4.6% in November, a level last seen in 2021, after a stretch of essentially no net hiring this fall. By contrast, price stability improved markedly: annual CPI inflation ticked down to 2.7%, the closest it’s been to the Federal Reserve’s 2% target in nearly four years. Responding to the softer outlook, the Fed cut interest rates again in mid-December – its third consecutive quarter-point cut. This move, however, revealed further divisions within the Fed, highlighting the delicate balance between downside risks to growth and lingering inflation concerns.
Despite some upbeat data – notably a blowout 4.3% GDP growth in Q3 driven by consumer and government spending – most forward-looking indicators signal a deceleration ahead. The Conference Board’s leading economic index (LEI) has fallen steadily through 2025 (down ~3% over the last six months), and business surveys point to cautious hiring and investment. The U.S. economy ended 2025 with skittish consumers and firms, a job market shifting into a lower gear, and the Fed pivoting to provide modest support. For investors, this environment underscores the importance of diversification and holding quality assets, while also opening the door to opportunities in beaten-down segments as the cycle turns.
It’s worth noting a divergence between sentiment and behavior: consumer spending has not collapsed. In fact, real consumer spending grew at a strong +3.5% annualized pace in Q3, and early data suggest holiday retail sales were modestly higher than last year. Consumers continue to spend on services (dining out, travel, streaming) and remain willing to buy big-ticket items under certain conditions (e.g. used cars were a popular option). This was largely the story of much of 2025 and yet proved to be a good year for markets.
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