US GDP surges on AI spending, trade shift in late 2025 | Economy Track

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Economic growth accelerated in 2025 following a slight pullback in the first quarter. For the third quarter, real Gross Domestic Product (GDP) grew at an annualized rate of 4.3%, the highest level in two years. For the fourth quarter, the Atlanta Fed is estimating real GDP to grow at an annualized rate of 5.3%. If this estimate were to materialize, it would be the largest quarterly increase in GDP since the fourth quarter of 2021. Net exports are a large part of the fourth quarter estimate, contributing more than 2% of the 5.3%. Imports are backed out of GDP, because they are goods and services produced overseas. We have also seen the trade deficit fall throughout the latter half of 2025 following the April tariff announcements when we saw imports explode as business tried to get ahead of tariffs. Today, the trade deficit is at the lowest level since 2009 as businesses are now in “wait and see” mode, hesitating to increase imports until there is a clearer picture on trade policy.

Another huge driver of real GDP growth in 2025 was the increase in capital expenditures related to artificial intelligence (AI) investment. For the first three quarters of 2025, contributions to GDP from business investment in technology (including information processing equipment, software, and R&D) have outpaced consumer spending. Continued spending and investment in AI may provide a tailwind for economic growth in 2026. Alternatively, our economy may prove to be reliant on continued AI investing if we were to encounter any consumer weakness.

Consumer spending remained robust in 2025 despite continued divergences between high- and low-income cohorts. Spending among the lowest income consumers has stagnated since 2022, whereas we have seen an increase in spending in mid- and high-income consumers. Wage growth among low-income workers continues to slow and has fallen behind wage gains for high income earners for the first time in the post-COVID period. As a result, consumer confidence among low-income consumers is meaningfully lower than that of high-income consumers. It is worth noting that the high-income consumer contributes meaningfully to consumer spending, with the top 60% of consumers in income making up nearly 90% of consumer spending. As a result, we can continue to see spending weakness among low-income consumers without it affecting overall consumer spending.

Little change in employment data

Unemployment came in at 4.4% for the month of December, the same level we saw in September, up from 4.1% at the beginning of the year. While we have not seen an increase in layoffs, job growth has slowed to a crawl as businesses appear to be in “no hire, no fire” mode. Historically, job growth at this level would coincide with larger increases in unemployment; however, our labor supply has been falling because of a decrease in immigration-based labor and lower labor participation. With falling labor supply, the US economy does not need as many jobs created to see the unemployment rate remain unchanged (breakeven job growth).The Dallas Fed estimates that breakeven job growth is around 34,000 per month, the lowest level in the post-COVID recovery, much lower than the peak estimate of 250,000 per month of June 2023.

Digging further into the jobs report, large businesses are keeping the job growth number positive, as small businesses with fewer than 50 employees have seen job losses in the latter part of 2025. Finally, the biggest contributor to job growth over the last year has been the healthcare sector, contributing 408,000 jobs for the year, almost the entirety of the 584,000 jobs created in 2025. Job growth has become increasingly reliant on healthcare, as more than half of the jobs created in the last three years have been in the healthcare sector.

Interest rates move lower

The Federal Open Market Committee (The Fed) has cut interest rates by 75 basis points (bps) or 0.75% since their September meeting. When weighing their dual mandate of stable prices and maximum employment, it seems the 75bps in rate cuts during the latter part of 2025 signal the Fed is more focused on the labor market because inflation continues to remain above their 2% target. It is worth noting that three Fed governors dissented on the December rate decision, with two governors voting to keep the rate unchanged, and one governor voting for a larger, 50bps cut. This is the largest number of dissents going back to 2020. Dissents are not a bad thing, as we want a committee that is diversified in thought; however, the increasing number of dissents suggests the data is not clearly indicating which direction the Fed should take rates. Currently, the Fed Fund futures market is pricing 50 bps in additional rate cuts for 2026.

Since the Fed began cutting rates in September 2024, we have seen the Federal Funds rate drop by 150 bps. Over that same period, longer term rates have increased, something we have not seen in previous rate cutting cycles. Since September 2024, the 10-year treasury rate increased from 3.70% to 4.15%, while the 30-year treasury increased from 4.03% to 4.79%. Typically, longer rates fall during rate cut cycles because the Fed is concerned about a slowing economy and labor market. Today, the bond market is not following the path of Fed rate cuts, at least not for now. This signals that the bond market may be focused on stubborn inflation, reaccelerating economic growth, and/or increasing deficits, any of which could keep interest rates high.

Market updates

The equity market rose to yet another record high during the final quarter of the year, with the S&P 500 posting a 2.7% quarterly return, on the heels of the third quarter’s 8.1% return. Similar to what we saw in the third quarter, the fourth quarter’s return profile reflected a relative calm and  steady climb to new highs in late December. This sense of calm after the tariff storm in early 2025 can also be seen in measures of financial market volatility, such as the CBOE Volatility Index (VIX) for the equity market, which has retreated substantially from April’s spike.

Looking at performance by sector, Healthcare, typically considered a more defensive group, was by far the best performing sector. After Healthcare, the next best performing sectors were Financials, Energy, Tech, Materials, and Industrials, all of which are typically characterized as being sensitive to the economic cycle, and whose performance might suggest some degree of comfort amongst investors regarding the overall macro environment. Interestingly, both Technology and Communication services underperformed the S&P 500 for the fourth quarter. Q4 was marked by increasing skepticism to what had previously been relative outperformance of the ‘Magnificent Seven’ group of companies levered to AI growth. This comes at a time when many companies are investing heavily in the future of AI. Real Estate was the worst performing sector as expectations for further rate cuts receded from the market.

International developed and emerging markets outperformed the US for both the fourth quarter and the full year 2025. A big driver of the international outperformance for 2025 was the 9% drop in the dollar over the same period. When the dollar falls relative to another currency it boosts returns in international companies. This is because the foreign asset values increase as more dollars are now required to purchase the same amount of the international company stock.

Ten-year bond yields ended the quarter just slightly below where they started, and well within the range that has been established for the better part of three years. Bond returns were slightly positive for the quarter. The Bloomberg Aggregate Bond Index was up 1.1% while the Bloomberg Credit Index was up 0.9%. High yield bonds increased 1.3% as credit spreads remained very tight.

Final thoughts

Today, the market must contend with its state of acute concentration as well as conventional measures of valuations that are difficult to describe as anything other than extreme relative to recorded history. While valuations are notoriously poor timing indicators, most would agree that they matter in the long run. Although we still see factors that could continue to support markets (continued AI spending, fiscal and monetary policy boosts), a market correction is a possibility. Market corrections are a regular phenomenon and consistently timing them is impossible. Now, we believe it is more important than ever to maintain a globally diversified portfolio that is matched with both your objectives and risk tolerance.

Matt Kelley is Chief Investment Officer, Cooper/Haims Advisors, an ESL company. In his role, Matt is responsible for institutional account portfolio management and oversees the portfolio strategy team, while supporting the broader ESL wealth entities.

Contributions also offered from Scott Shattuck, Senior Portfolio Analyst, Cooper/Haims Advisors.

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed.