BND Scope: Issue 21 - U.S. Growth Is Slowing, and Investors Are Becoming More Selective

In January, the Consumer Price Index rose 0.2% month over month and 2.4% year over year . Energy prices declined and helped moderate the headline number, but core categories continued to rise. Housing and several service components are still contributing meaningfully to overall price pressure. In other words, the decline in inflation is not uniform; some categories are clearly cooling, while others remain sticky.

On the PCE side, the acceleration in December’s monthly reading reinforces that inflation pressures have not fully dissipated. This backdrop makes it unlikely that the Federal Reserve will rush into rate cuts. Inflation is moving lower, but it has not yet settled convincingly at target. As a result, markets may need to extend their timeline for policy easing.

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Real GDP grew at an annualized rate of 1.4% in the fourth quarter of 2025, down sharply from 4.4% in the third quarter. The deceleration is clear. However, growth has not stalled. Consumer spending and private investment continued to expand, while government spending and exports weighed on the headline figure. The federal government shutdown also had a measurable technical impact on reported growth.

More importantly, real final sales to private domestic purchasers increased 2.4%, indicating that underlying domestic demand remains positive. December retail sales were flat on a monthly basis but continued to grow year over year. Consumers have not pulled back entirely — but the pace of spending growth has moderated.

For businesses, this points to differentiation. Companies highly sensitive to demand and carrying elevated leverage may face more pressure, while firms with strong cash flow and disciplined balance sheets may prove more resilient.

The data released in mid-February suggest that the U.S. economy is not contracting, but it is slowing compared with the strong pace seen in the second half of 2025. Inflation is easing, yet remains above target in key service categories. Growth continues, but at a noticeably lower rate than the previous quarter. In housing, demand has not disappeared, but limited supply is preventing a balanced recovery. This environment is not prompting broad risk aversion — but it is encouraging investors to act more cautiously and selectively.

Inflation Is Cooling, but Services Remain Firm

Growth Continues, but at a Slower Pace

Housing: Demand Exists, Supply Is the Constraint

Pending home sales declined 0.8% in January, marking a second consecutive monthly drop following December’s sharp decline. Regional divergence is notable: some areas saw improvement, while others continued to weaken.

Mortgage rates near 6% theoretically allow more households to qualify for financing. However, as the National Association of Realtors has noted, improved affordability conditions have not yet translated into materially stronger transaction volumes. The primary constraint is supply. Without an increase in available housing inventory, additional buyers entering the market could push prices higher.

This dynamic explains why housing costs continue to exert pressure on inflation. The housing market is not collapsing — but it is also not generating broad-based momentum. Limited supply keeps price pressures from fully unwinding.

Conclusion

The latest data do not indicate that the U.S. economy has entered recession. However, the strong growth momentum of 2025 has clearly moderated. Inflation is declining, but service components remain firm. Consumer spending continues, though at a more measured pace. Housing is constrained by supply, sustaining price pressure.

This is not an environment that supports indiscriminate risk-taking. Instead, it favors selectivity. With the timing of rate cuts uncertain, interest-rate-sensitive assets may remain volatile. Companies with strong balance sheets, stable cash flows, and productivity advantages appear better positioned in this phase.

The economy is not stopping. But it is no longer accelerating. That shift calls for more disciplined capital allocation.