Consumer Confidence Declines While Q3 GDP Growth Surges

This week’s economic data includes: (1) The Conference Board’s Consumer Confidence Index, (2) Q3 2025 GDP, and (3) weekly initial jobless and continuing claims.

KEY SUMMARY:

Consumer confidence fell to its lowest level since April, signaling increased recession risk as pessimism about business conditions, jobs, and spending plans deepen across most demographics and income groups.

Consumer confidence weakened notably in December, with the Conference Board’s Consumer Confidence Index dropping 3.8 points to 89.1 – the lowest since April and below expectations. This marks the fifth straight monthly decline and a 20.4-point annual drop, a level historically signaling recession risk within months. The Present Situation Index fell sharply by 9.5 points to 116.8, its lowest since March 2021, as more consumers viewed business conditions negatively and job availability worsened. The labor market differential narrowed to 5.9, with fewer reporting jobs as plentiful and more seeing them as hard to get. Meanwhile, the Expectations Index held at 70.7, remaining below the recession threshold for the eleventh consecutive month, reflecting persistent pessimism about income and employment prospects.

Confidence declined across all age groups and most income brackets, though younger consumers and high earners remained relatively more optimistic. Inflation concerns persisted despite a slight easing in price expectations, and recession fears lingered, with more consumers believing a downturn is underway. Spending plans shifted toward essentials and affordable entertainment, while big-ticket purchases like homes, appliances, and electronics saw reduced interest. Used cars, TVs, and smartphones remained popular, but vacation plans continued to fall. Overall, December’s data suggests cautious consumer behavior, signaling potential headwinds for economic growth in early 2026.

The U.S. economy grew 4.3% in Q3 2025—its fastest pace in two years—driven by strong consumer spending and a rebound in exports, but looming headwinds from the government shutdown, falling consumer confidence, and weak investment point to slower growth in Q4 and projected annual GDP growth of about 2%.

The U.S. economy grew at an annualized rate of 4.3% in Q3 2025, beating expectations and marking the fastest pace in two years. Growth was fueled by strong consumer spending, which rose 3.5%, and a sharp improvement in trade as exports surged 8.8% while imports fell 4.7%. Net exports contributed significantly to GDP, while government spending also increased 2.2%, led by defense outlays. Private investment remained weak, declining 0.3%, with shrinking inventories subtracting from growth and residential investment falling for the seventh straight quarter.

Consumer spending drove most of the expansion, supported by gains in health care services and recreational goods, while trade benefited from higher exports of goods and services. However, private investment continued to show softness, particularly in housing and structures, despite modest growth in equipment investment tied to AI-related technology. Final sales to private domestic purchasers rose 3.0%, signaling solid underlying demand even as inventory drawdowns weighed on headline GDP.

Looking ahead, the outlook is less upbeat. The government shutdown in October and November dampened momentum, retail sales showed mixed signals, and consumer confidence fell for the fifth consecutive month in December – the longest streak since 2008. With recession fears rising and big-ticket spending plans shrinking, the Congressional Budget Office projects Q4 GDP to slow by 1%–2%, while markets expect about 1% growth, bringing full-year GDP to roughly 2% for 2025.

Initial jobless claims dropped to 214,000, signaling a stable labor market despite a slight uptick in continuing claims.

Initial jobless claims fell by 10,000 to 214,000 for the week ending December 20, coming in below expectations and signaling a stable labor market after early December’s spike.  The four-week average dipped slightly to 216,750; continuing claims rose to 1.923 million but remain generally steady, indicating underlying labor market resilience despite modest fluctuations.

Equity markets ended the week higher on strong economic data and holiday optimism, while Treasury yields held steady and markets continue to price in two rate cuts for 2026.

Equity markets wrapped up the week on a strong note, buoyed by better-than-expected Q3 GDP growth, lower jobless claims, and holiday-season optimism. Investors are also anticipating the traditional “Santa Claus rally,” which typically occurs during the last five trading days of the year and the first two of the new year. Major indexes posted solid gains, with Nasdaq up 2.55% for the week and 22.18% year-to-date, the S&P 500 rising 2.29% weekly and 17.82% YTD, the Dow adding 1.58% weekly and 14.49% YTD, and the Russell 2000 climbing 1.06% weekly and 13.64% YTD.

Treasury yields were largely stable, showing slight declines across most maturities, as the market reaction to strong economic data was muted due to the holiday-shortened week and light trading volume. Meanwhile, rate expectations remain unchanged, with markets fully pricing in two 25-basis-point cuts, in April and September 2026, which would bring the federal funds rate upper bound down to 3.25% from the current 3.75%.No cuts are currently anticipated for 2027.

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DETAILED ANALYSIS:

Consumer Confidence – December Update:

The Conference Board reported that its Consumer Confidence Index (CCI) fell by 3.8 points to 89.1 in December, marking the lowest level since April and coming in below market expectations of 91.0. This decline represents the fifth consecutive monthly drop, driven primarily by more pessimistic views of business conditions and the labor market. On an annual basis, the CCI fell 20.4 points in December. A decline of 20 points or more over one year is considered a red flag, as recessions typically follow within one to six months of breaching this threshold, because such a sustained deterioration in sentiment often leads to reduced consumer spending.  Consumer spending, in turn, accounts for over two-thirds of the economy.

Present Situation Index

The Present Situation Index, which measures consumers’ assessment of current business and labor market conditions, plummeted by 9.5 points to 116.8, the lowest level since March 2021. This sharp decline was driven by more consumers viewing current business conditions as bad rather than good for the first time since September 2024—a month marked by a labor market scare and severe hurricanes. Perceptions of employment conditions worsened as the labor market differential fell to 5.9, with the share of consumers reporting jobs as plentiful dropping to 26.7%, while those viewing jobs as hard-to-get rose to 20.8%. This metric, closely watched by markets, is now at its lowest level since February 2021.

Expectations Index

The Expectations Index, which gauges consumers’ short-term outlook for income, business, and labor market conditions, held steady at 70.7 – the lowest level since June – and remained below the recession signal threshold of 80 for the eleventh consecutive month. Consumers’ outlook on the labor market deteriorated further, with more expecting fewer job opportunities in the next six months and expressing concerns about income prospects.

Demographics and Income Trends

Confidence declined across all age groups in December, although consumers under 35 remained more confident than their older cohorts. Generational differences were minimal, with all trending downward except the Silent Generation (those 80 years of age and older), which grew slightly more hopeful. Millennials and Gen Z continued to be the most optimistic.

By income, confidence fell for nearly all brackets except those earning less than $15K and more than $125K. The under-$15K group remained the least optimistic, while the highest earners were the most confident, largely supported by stock market gains and housing equity. Confidence also declined across all political affiliations—Democrats, Republicans, and Independents.

Inflation and Recession Sentiment

Inflation remains a top concern, though price expectations eased slightly to 5.7% in December from 5.8% in November. While recession fears have moderated, the share of consumers who believe a recession is “somewhat likely” increased, and more now think a recession has already begun.

Spending and Purchase Plans

Consumers became more cautious about big-ticket purchases:

• Autos: New car buying plans dipped, although plans to purchase used cars rose.
• Housing & Appliances: Plans for homebuying and appliance purchases slipped.
• Electronics: Plans for PCs, laptops, and gaming consoles declined, while spending intentions for smartphones, tablets, and digital cameras trended upward.

Used cars, TVs, and smartphones remained the most popular anticipated purchases.

In 2025, consumer spending shifted toward affordable entertainment and essential services, away from costly discretionary activities. In December, planned spending on services held steady, with strong interest in restaurants, streaming, personal care, utilities, and healthcare. Vacation plans continued to decline, with both domestic and international travel falling.

Q3 2025 GDP – Initial Release: 

According to the initial estimate from the Bureau of Economic Analysis (BEA), the U.S. economy grew 4.3% in Q3, up from 3.8% in Q2 and above market expectations of 3.3%. This marks the strongest pace since Q3 2023 (4.7%), driven primarily by robust consumer spending and a smaller trade deficit due to strong export growth and lower imports resulting from the recent imposition of import tariffs.

GDP Contribution Breakdown

• Consumer Spending: +2.39%
• Private Investment: -0.02%
• Net Exports: +1.59%
  • Decline in imports: +0.67%
  • Increase in exports: +0.92%
• Government Spending: +0.39%

Consumer Spending:

Consumer spending, which accounts for two-thirds of GDP, rose 3.5% (up from 2.5% in Q2), driven by both goods and services:

• Goods:
  • Recreational goods & vehicles: +0.33% (boosted by information processing equipment)
  • Other nondurable goods: +0.30% (led by prescription drugs)
• Services:
  • Health care: +0.76% (growth in outpatient, hospital, and nursing home services)
  • Other services: +0.40% (increase in international travel)

Trade:

Exports rebounded sharply, up 8.8%, while imports fell 4.7%, both contributing positively to GDP:

• Exports:
  • Goods: +7.4% (led by capital goods and nondurable consumer goods)
  • Services: +11.2% (driven by professional and management consulting)
• Imports:
  • Goods declined (led by nondurable consumer goods)
  • Services rose (led by business services)

Government Spending:

Government spending increased 2.2%, driven by both federal and state/local:

• Federal: +2.9% (after Q2 and Q1 declines), led by:
  • National defense consumption: +6.6%
  • National defense investment: +3.1%
• State & Local: +1.8%, mainly consumption expenditures (+2.1%)

Private Investment:

Private investment fell 0.3%, following a sharp 13.8% drop in Q2:

• Inventories: Subtracted 0.22% from GDP (led by wholesale trade and manufacturing)
• Fixed Investment: Added 0.19%
  • Nonresidential: +2.8% (down from +7.3% in Q2)
    • Equipment: +5.4% (slower than Q2’s +8.5%, driven by AI-related computer investment)
    • Structures: Declined for the 7th straight quarter; data center investment slowed
  • Residential: Fell 5.1%, matching Q2 decline, signaling housing weakness

Final Sales to Private Domestic Purchasers:

This key measure of private demand, excluding inventories, trade, government spending and other volatile categories, rose 3.0%, up from 2.9% in Q2, marking the highest level since Q3 2024.

Commentary:

The economy expanded in the third quarter at the fastest pace in two years, just before the longest government shutdown on record, which lasted from October 1 to November 12. The shutdown reduced economic output due to significantly lower federal spending, delayed paychecks for federal workers (and the resulting reduced spending), and disruptions to essential services such as air traffic control, which led to flight cancellations and airline losses.

Headline retail sales for October showed no growth, but control group retail sales—used in GDP calculations—rebounded sharply from September. As highlighted in Q3 consumer spending, the economy continued to exhibit a K-shaped pattern, with high-income consumers spending on discretionary items like international travel, while lower-income households remained cautious amid tighter budgets. A soft labor market and elevated cost of living are likely to deepen this divide in consumer spending by income in Q4 and into 2026.

in December, consumer confidence fell for the fifth consecutive month, matching the longest losing streak since 2008. Consumers grew more pessimistic about the job market and their financial situations, signaling plans to cut back on big-ticket purchases. The nonpartisan Congressional Budget Office (CBO) projects a 1% to 2% reduction in Q4 GDP, while market expectations point to 1.0% growth, resulting in a projected annual GDP increase of approximately 2% for 2025.

Jobless Claims – Week Ending December 20:

The Labor Department reported that initial jobless claims fell by 10,000 to 214,000 for the week ending December 20, down from 224,000 the prior week and below market expectations of 224,000. After a sharp increase of 45,000 in the first week of December, claims have trended lower for the past two weeks. The four-week moving average, which smooths seasonal fluctuations, declined to 216,750, down 750 from the previous week’s unrevised average of 217,500, signaling a stable labor market with limited layoffs.

Continuing claims, which track individuals receiving unemployment benefits and are reported with a one-week lag, rose to 1.923 million for the week ending December 13, up 38,000 from 1.885 million (revised down from 1.897 million) the prior week and above expectations of 1.900 million. The four-week moving average dipped by 5,000 to 1.894 million from 1.899 million, indicating underlying stability despite the weekly uptick.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets closed the week higher, supported by stronger-than-expected Q3 2025 GDP growth, lower weekly jobless claims, and holiday-season optimism. Investors are also eyeing the potential for a “Santa Claus rally”—the last five trading days of the year and the first two of the new year, starting December 24.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +2.55% (weekly) & +22.18% (YTD), closing at 23,593
• S&P 500: +2.29% (weekly) & +17.82% (YTD), ending at 6,930
• Dow Jones Industrial Average: +1.58% (weekly) & +14.49% (YTD), closing at 48,711
• Russell 2000: +1.06% (weekly) & +13.64% (YTD), ending at 2,534

Treasury Market Update

Treasury yields were largely stable over the week, showing slight declines across most maturities:

• 2-year yield: 3.46% (-0.02%)
• 5-year yield: 3.68% (-0.02%)
• 10-year yield: 4.14% (-0.02%)

The market’s response to the strong Q3 GDP growth and lower-than-expected initial jobless claims was virtually nonexistent, largely due to the holiday-shortened week and low trading volume.

Rate Cut Expectations

As was the case last week, markets have fully priced in two 25-basis-point cuts—expected in April and September 2026—while no cut is currently anticipated for 2027. These adjustments would lower the federal funds rate upper bound to 3.25%, down from the current 3.75%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 12/29 (Monday):
  • Pending Home Sales (November)
• 12/30 (Tuesday):
  • FOMC Meeting Minutes
• 12/31 (Wednesday)
  • Weekly Initial and Continuing Jobless Claims
• 1/2 (Friday)
  • PCE Price Index (October)
  • Personal Income and Spending (October)

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 12.26.2025 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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