The health of the U.S. economy, as measured by gross domestic product (GDP), is driven overwhelmingly by the consumer. The components of GDP = C (Consumer Spending) + G (Government spending) + I (Private sector investment) + (X-M) (Exports-Imports). Of those components, over 70% of GDP is consumer spending. When consumers see real wage growth (nominal wage growth adjusted for inflation) – they spend more money. Due to the strength of the consumer, the most predicted recession in our history never came to fruition. However, a more cautious consumer for the first half of 2025, with a deceleration in spending and confidence, looks plausible. Will that lead to a recession? Time will tell, but some recent economic data releases are starting to paint a worrisome picture of the consumer. On February 14th, retail sales for the month of January showed a decline of 0.9% month-over-month, significantly weaker than economists had expected after four consecutive monthly gains. While year-over-year gains were still solid at 4.2%, this release points to a troubling start to the 1st quarter of 2025.
Weaknesses were found across several categories including: spending at furniture and home furnishing stores, clothing stores, sporting goods stores, and electronic and appliance stores. While this number taken alone doesn’t really tell us much, it has been followed by two disappointing “soft” economic data releases (surveys/qualitative vs. quantitative/objective).
The University of Michigan Institute for Social Research conducts monthly surveys of consumers. These surveys ask wide ranging questions related to the overall attitudes and expectations of the American consumer. The results are broken out into three different indexes: The Index of Consumer Sentiment, Current Economic Conditions Index and Index of Consumer Expectations. The Consumer Sentiment Index released last Friday declined 10% from January, representing the lowest reading in over a year.
Additionally, consumer confidence figures released earlier this week dropped to their lowest level in 4 years. Further economic data releases in the coming days and weeks will be needed to see if this is a short-term hiccup (fingers crossed), or a trend in its beginning stages.
A Little over a Month In – The Good, Bad and Ugly
Government Efficiency (The Good)
The federal government operates with significant expenditures, and improving efficiency remains a key focus. The administration has introduced the concept of “DOGE” as a potential approach to streamlining operations. The initial actions will, no doubt, reduce Federal expenditures. However, the rapid and unstructured implementation of these initiatives has raised concerns about their effectiveness.
Policy Uncertainty (The Bad/Ugly)
Uncertainty in policy direction can have broad economic effects whether that is from DOGE implementation, tariffs, or visa access for professional working immigrants. When consumers and businesses face unclear regulatory or economic policies, they may become more cautious with spending and investment decisions. This hesitation can slow economic growth and, in some cases, contribute to economic downturns. The administration is still in its early days, as it continues to develop policies, clarity in direction may help alleviate some of these concerns and improve consumer and business sentiment.
Financial Planning Corner
Building off last week’s newsletter, which was filled with important information regarding actions you can take prior to filing your taxes, I want to reiterate the importance of health savings accounts (HSAs). This is the only type of account where you get a triple tax-advantage:
- You contribute to the account on a pre-tax basis (or can be an above-the-line deduction if contributions are made by someone other than your employer)
- Funds within the account can be invested and grow tax-free
- *Qualified withdrawals* are tax-free. It’s a win-win-win.
Additionally, a nuanced rule with HSA’s permit an amount above the usually mentioned “maximum.” If you are 55 or older and not yet enrolled in Medicare, and file as married filing jointly, both you and your spouse can contribute the $1,000 catch-up. The only caveat is both spouses must establish their own HSA account. So, for 2024, a family could contribute up to $10,300 ($8,300 for family coverage, one spouse contributes $1,000 catch-up, the other spouse contributes $1,000 catch-up). A cool feature that allows you to save some additional dollars. For clarity sake, here is an example: IRS Courseware - Link & Learn Taxes
*IRS states what is/isn’t a qualified withdrawal Publication 969 (2024), Health Savings Accounts and Other Tax-Favored Health Plans | Internal Revenue Service
Quick Hits:
- In my opinion, the best three weeks of sports are right around the corner. Selection Sunday is March 16th. Here is a list of dates and sites: 2025 March Madness: Men's NCAA tournament schedule, dates | NCAA.com
- Spring can’t come soon enough (a place close to my heart appears on the list 😊): 7 Top Places to Catch Spring Blooms Across America
- Another reminder of spring around the corner: Daylight Saving Time 2025: Dates & Times - Farmers' Almanac
Quote: “If you want to see the sunshine, you have to weather the storm.” – Frank Lane
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback, and please forward this to a friend! Be well, take care, and stay safe!
