Economic Growth Slows, But Consumer Spending Remains Robust
The US economy experienced a slowdown in growth during the fourth quarter, largely due to a strike at Boeing and a decline in business investment. However, strong consumer spending is expected to keep the Federal Reserve on a slow interest rate cut path this year.
Domestic Demand Remains Strong
Despite the moderation in growth, domestic demand remains robust, with final sales to private domestic purchasers increasing at a 3.2% rate. This measure of domestic demand grew at a 3.4% pace in the third quarter, indicating a strong underlying economy.
Inflation Warming Up
Inflation showed signs of warming up last quarter, with the personal consumption expenditures (PCE) price index, excluding food and energy, rising at a 2.5% rate compared to a 2.2% pace in the third quarter.
GDP Growth Slows
Gross domestic product increased at a 2.3% annualized rate last quarter, down from a 3.1% pace in the July-September quarter. Economists had forecast GDP rising at a 2.6% pace.
Fed Policy on Track
The Federal Reserve’s policy of slow interest rate cuts appears to be on track, with the central bank leaving its benchmark overnight interest rate in the 4.25%-4.50% range. The Fed has forecast only two rate cuts this year, down from the four it had projected in September.
Consumer Spending Soars
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 4.2% rate last quarter, the fastest since the first quarter of 2023. This was driven by a resilient labor market, which is churning out solid wage gains.
Trade and Inventories
Imports declined despite robust consumer spending, compressing the trade deficit. Trade was neutral to GDP after being a drag for three consecutive quarters. Less inventory was accumulated by businesses, suggesting that consumers were engaged in pre-emptive buying in anticipation of tariffs.
Business Investment Weak
A crippling strike by factory workers at Boeing contributed to depressed spending on equipment, with investment in equipment contracting at a 7.8% rate. Spending on structures declined for a second straight month, while investment in intellectual property products increased, but at a slower pace than the third quarter.
Residential Investment Rebounds
Residential investment rebounded, but rising mortgage rates remain an obstacle. Growth in government moderated, and the outlook is cloudy amid plans by the Trump administration to slash spending.
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