Despite increasing interest rates in 2022 and 2023 economic growth remained solid, with GDP growth of 2.5% and 2.9%, respectively. After cooling to 1.6% in the first quarter of 2024, economic growth was impressive at 3.0% in the second quarter and 2.8% in the third quarter. Importantly, both personal consumption and investment spending (including business investment in equipment and inventories) made significant contributions to economic growth in 2024. Personal consumption continues to be the primary driver of economic growth, increasing GDP by 2.46% in the third quarter. Economic Growth 2025 Preview The United States economy typically chugs along at a pretty good pace unless there is a bump (relatively minor negative event) or shock (relatively major negative event) to derail its progress. The problem with bumps and shocks is that they are not always predictable. The key is to get the economy moving forward, precipitating a snowballing effect, where economic growth continues until something happens to stop it. When economic growth occurs, increased employment leads to more consumer spending, which leads to more economic growth. Likewise, a snowballing effect can occur in the opposite direction. If consumer spending declines, then an economic contraction continues until something happens to reverse it. If something happens to derail consumer spending, that’s where fiscal policy (spending by the U.S. government or changes in tax policy) and/or monetary policy (the Federal Reserve reducing interest rates) can be used to put consumer spending back on track. The chart below shows annual GDP growth since 1990. The shaded areas represent recessions, when GDP growth in at least two consecutive quarters was negative.
Real Gross Domestic Product - Compounded Annual Rate of Change 1990-2023 (Sources: U.S. Bureau of Labor Statistics, Federal Reserve Economic Database)
Four economic bumps or shocks have occurred since 1990 which led to recessions: • An economic bump occurred in 1991 due to the Federal Reserve increasing interest rates and an oil price shock. By 1990 inflation exceeded 5%; the Federal Reserve countered by increasing the fed funds rate to lower consumer spending and reduce inflation. In July 1990 the fed funds rate stood at 8.0%. An oil price shock also occurred as oil prices more than doubled in 1990 in response to the Iraqi invasion of Kuwait. • The United States began the new century with a variety of bumps to the economy. The dot.com bubble was over, with overhyped tech and internet stocks crashing back to reality. The technology heavy Nasdaq index declined over 75% between March 2000 and October 2002. The September 11, 2001 terrorist attacks contributed to the economic decline, as uncertainty and fear gripped the economy. In addition, the financial markets were plagued by accounting scandals (Enron). Although GDP growth was positive for the entire 2001 year at 1.0%, economic growth was negative for two quarters resulting in a minor recession. • By late 2007, a major shock to the U.S. economy was beginning. Credit was easy and mortgage-backed securities allowed a transfer of risk from lenders to investors in mortgage-backed securities. Although a myriad of factors contributed to the financial crisis, rising interest rates lit the fuse for the economic implosion. As the economy rebounded from the 2001 recession and concerns over inflation grew, the Federal Reserve increased
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Center for Business and Economic Insight
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