The Markets – March 3, 2025

Is it supposed to be doing that?

At the end of last year, economists believed the chance of a recession in 2025 was relatively low. In December, economist Torsten Sløk wrote, “The outlook for the US economy remains strong with no signs of a major slowdown going into 2025.”

The economy has not been performing as expected, though.

“The U.S. Citi Economic Surprise Index, which tracks the difference between economic data and expectations, has fallen to its lowest level in almost six months. The index rises when the surprises are favorable, so the decline means the data are showing a less robust U.S. economy than expected,” reported Jacob Sonenshine of Barron’s.

One surprising piece of data is the slump in U.S. consumer confidence.

The University of Michigan Consumer Sentiment Survey reported that consumers have become less optimistic. Sentiment declined by 9.8 percent from January to February. The Conference Board Consumer Confidence Index showed a 7.0 percent drop over the same period.

“The decrease was unanimous across groups by age, income, and wealth…Year-ahead inflation expectations jumped up from 3.3 [percent] last month to 4.3 [percent] this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases,” reported Surveys of Consumers Director Joanne Hsu.

The slump in sentiment is concerning because consumer spending is the primary driver of U.S. economic growth – accounting for about two-thirds of gross domestic product (GDP), which is the value of all goods and services produced in the country over a certain period. In general, when consumers are uneasy, spending tends to slow and so does economic growth.

Currently, one consumer group has more influence than others do.

When analysts took a closer look at consumer spending, they found a growing wealth gap.  “The wealthiest 10% of American households—those making more than $250,000 a year, roughly—are now responsible for half of all US consumer spending and at least a third of the country’s gross domestic product,” reported Amanda Mull of Bloomberg. “In the 1990s, spending by top-decile earners usually constituted a third or so of annual consumer spending overall. Now, their spending constitutes the largest share of the consumer economy in data going back to 1989.”

Last Friday, we learned that consumer spending declined 0.5 percent month to month, after inflation, in January. It was the biggest monthly decline in almost four years. “US consumers unexpectedly pulled back on spending on goods like cars in January amid extreme winter weather, and a slowdown in services, if sustained, may raise concerns about the resilience of the economy,” reported Augusta Saraiva of Bloomberg.

While we’ve seen a lot of uncertainty and some softer-than-expected economic data, the likelihood of a recession over the next 12 months remains low. Economists polled by The Wall Street Journal’s Economic Forecasting Survey put the odds at 22 percent, reported Andy Serwer of Barron’s.

No matter where the economy is headed, investors can manage the risks associated with market volatility through asset allocation and diversification. If you have not reviewed your portfolio recently, this is a good time to make sure your asset allocation is appropriate for your financial goals and risk tolerance. If you would like help, let us know.

Last week, the Dow Jones Industrial Average moved higher, while the Standard & Poor’s 500 and Nasdaq Composite Indexes moved lower. Treasuries rallied and the yield on the benchmark 10-year U.S. Treasury moved lower over the week.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

ARE YOU BUNCHING? The Tax Cuts and Jobs Act (TCJA) introduced a higher standard deduction – $15,000 for single filers and $30,000 for people who are married and filing jointly in 2025. While the higher deduction was beneficial to many taxpayers, those who are near the cutoff for itemizing may employ an approach known as “bunching”, which makes it possible for taxpayers to itemize every other year, reported Adam Nash of Kiplinger’s.

Here’s how it works: taxpayers condense two years of tax-deductible expenses into a single tax year. Then, they itemize taxes for that year. In general, three types of expenses can be bunched. They include:

Charitable gifts. Some people choose to bunch charitable gifts into a single year by donating in January and then again in December. This increases the amount that can be itemized in a single year. There are other approaches that can help maximize charitable contributions into a single year, as well.

Medical expenses. Taxpayers can deduct qualified healthcare costs that are not reimbursed, as long as the amount exceeds 7.5% of their adjusted gross income. So, when you know a big medical expense is ahead, if it is possible plan the procedure for a year when you are itemizing.

Property taxes. If a municipality allows it, homeowners can make the previous year’s property tax payment in January and make the current year’s property tax payment in December. Currently, there is a $10,000 cap on state and local government taxes (SALT), which include property taxes, reported the Tax Foundation.

Some provisions of the TCJA are set to expire at the end of this year, including the cap on SALT. ^The administration has yet to decide how SALT deductibility will be modified. The options under consideration include:

• Repealing the SALT deduction, which would raise $1 trillion over 10 years.
• Making the $10,000 cap permanent and doubling it for married couples.
• Raising the cap to $15,000 for individuals and $30,000 for married couples.
• Eliminating income and sales tax deductibility while keeping property tax deductibility.
• Eliminating the SALT deduction for businesses.

This information is not intended as tax, legal or accounting advice. It is offered for informational purposes only. Talk with a tax professional and your financial advisor before taking action.

Weekly Focus – Think About It

“Normal is an illusion. What is normal for the spider is chaos for the fly.”

—Charles Addams, Cartoonist

Best regards,

Daniel J. Murphy, CFP®
Murphy Wealth Management Group
60 Merritt Blvd., Suite 106
Fishkill, NY 12524

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