Economic Update 1-27

We are finally starting to see various agencies catch up from the government shutdown in October and November of last year. One of the most watched economic releases is always the quarterly GDP numbers. The final third quarter number showed growth of 4.4%, a significant jump from the 3.8% level of the second quarter of 2025. This was also the strongest growth quarter since the third quarter of 2023. The increased strength can be attributed directly to gains in consumer spending and a rebound in exports to other countries. Exports were up 9.6% during the quarter compared to a decline of 1.8% in the prior quarter.

Another key economic measurement for the third quarter of 2025 was that corporate profits were up 4.7%, comparing favorably to the 4.4% estimate. This also represented a significant improvement from the weak 0.2% level reported during the second quarter of last year.

In November of last year, U.S. manufactured durable goods orders rose 5.3%, which compares very favorably to the 2.1% decline in October. The largest contributor to the turnaround was a 14.7% jump in transportation equipment. Electrical equipment and appliances were also key contributors to the higher levels. Durable goods orders ex-defense gained 6.6% in November, representing the highest level since May of 2025.

I think the above continues to show the economy is in a stronger position and reflects positive contributions from various sectors. Unfortunately, the possibility exists that we may see another government shutdown at the end of this week. The short-term spending agreement to end the last shutdown expires on January 31st, and it appears that a new agreement will not be finalized by this Friday. I think the potential for this to occur again could create some pressure on the financial markets. Hopefully, a new agreement can be accomplished within a few days and the impact will be limited.

The Federal Reserve is also meeting today and Wednesday, with an interest rate decision expected tomorrow afternoon. I think the most likely outcome from this meeting is to keep the Fed funds rate unchanged. Even though we are seeing improved inflation numbers, the renewed economic strength probably gives the Fed reason to keep rates at current levels. However, we know the President is putting pressure on Chairman Powell to cut rates, and he will likely not react positively if the decision is to keep the current rate as is. It is called “politics.”

We will be following the above developments very closely this week and continuing to focus on the underlying, longer-term economic trends rather than the short-term news cycle. Consumer balance sheets have shown signs of stabilization, while spending continues to grow at a healthy pace. This combination supports ongoing economic expansion and, over time, can be constructive for equity markets. While we remain attentive to near-term developments, our portfolio decisions are guided primarily by our longer-term outlook. We also hope each of you was able to stay safe and warm during the recent severe weather across the country.