Well, this has been quite the week. It never ceases to amaze me how equities always seem take the stairs up and the elevator down, meaning they seem to fall at a FAR more rapid pace than they rise. As is always the case, when markets fall, the media is fast to latch on to any and all explanations they can find for the negative price action. This week, while tariffs were of course a key item, the other phrase repeated over and over again was “growth scare.” Let’s look at why this is suddenly a concern and what is likely to transpire from here.

How is US Economic Growth Tracked?

Growth in the US economy is tracked by the quarterly (and annual) change in a metric called Gross Domestic Product, or GDP. It’s formula is Consumption + Investment + Government Spending + Net Exports. Consumption refers to private-consumption expenditures by households and nonprofit organizations. Investment is spending by businesses and home purchases. Government spending is just that, spending by the government on goods and services. Net exports is US exports minus its imports.

GDP is reported quarterly and the percentage change is used as a common metric for how the US economy is doing. Side note: Many view (incorrectly) two negative quarters of GDP growth as a recession and while that is not the precise indicator, it tends to track pretty closely. Needless to say, GDP is an important metric that is closely tracked.

What’s “normal” GDP growth for the US?

Since COVID, GDP growth in the US has been relatively strong. In 2020, due to COVID, it was -2.2%. In 2021, it rebounded sharply to 5.8%, leveled off at 1.94% in 2022, and once again came on strong in 2023 and 2024 at 2.5% and 2.8% respectively. Many economists were calling for 3%+ GDP growth in 2025.

Why the Concerns about Growth this Week?

While GDP is reported quarterly, there is a tool that tracks it on a somewhat real time basis known as the GDPnow tracker, published by the Federal Reserve Bank of Atlanta. While not an official estimate, it is a model-based projection that markets take very seriously. As you can see, the estimate for Q1 2025 fell off the proverbial cliff this week.

As you can see , estimates for Q1 2025 growth had been above 3% at the start of February – and as of this week are now negative 2.5%. What happened? Has economic growth in the US really plummeted that dramatically?

Keep in mind the formula discussed above. One of the four items added together is net exports. The pendulum swing in GDP was driven by a massive surge in the trade deficit (with imports vastly exceeding exports, making the Net Exports portion of GDP negative). Why did that materialize? Likely due in large part to the tariffs as companies tried to front run them by importing goods ahead of their effective date.

There was some other weakness in the number beyond the evident move in Net Exports, namely a softening in consumption by the private sector (ie Individuals). There may be some noise from the weather and wildfires in CA impacting January spending but it does appear there may be some softening in consumer spending. The main element of that metric (final sales to private domestic purchasers) was 3.2% in Q4 and is now estimated at 1.8%. Yes it’s only one month but that is not an encouraging trend.

What Should I Take from This?

You are going to continue to hear the term “growth scare” for the foreseeable future. US growth has been very strong and while a moderation was likely to occur in 2025, the concern is now a screeching halt versus a gradual decline. The US economy is largely driven by consumer and business spending, both of which can be negatively impacted by uncertainty (which is high at the moment) and the perceived wealth effect (which is falling as equity valuations fall). While the drop in GDP is likely not as severe as the above chart illustrates (due to the net export anomaly), it is likely softening which will continue to worry markets.

However, keep in mind, that the Federal Reserve is also paying very close attention to this, as well as the trends in its dual mandate of price stability (inflation) and job growth (labor markets). Ongoing weakness on any of these fronts may prompt further rate cuts to spur economic activity (as lower borrowing rates tend to do) – which would be a positive for GDP growth and risk assets like equities.

All that to say, there are currently (and always have been) many factors impacting markets and investors. While we haven’t been in this exact moment before, we certainly have been in other unnerving periods. And you’ve made it to the other side each and every time.

I’ll leave you with this final reminder courtesy of Robin Arzon (Peloton Instructor) from a spin class I took this week: It doesn’t get easier, you just get stronger

Onward we go,