U.S. Economic Growth Slows in Fourth Quarter

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. economic growth slowed in the fourth quarter as a strike at Boeing (NYSE:BA) depressed business investment in equipment. However, consumer spending increased at its fastest pace in nearly two years, indicating strong domestic demand that may keep the Federal Reserve on a cautious interest rate cut path this year.

The moderation in growth last quarter, reported by the Commerce Department on Thursday, was also due to businesses struggling with a surge in demand, driven by households preemptively buying goods ahead of potential tariffs on imports promised by President Donald Trump.

Businesses experienced nearly depleted inventories and a surprising decline in imports, despite imports boosting the goods trade deficit to a record high in December. This prompted economists to downgrade their fourth-quarter growth estimates.

Last year, the economy defied recession fears incited by the U.S. central bank hiking rates by 5.25 percentage points in 2022 and 2023 to curb inflation. Dissatisfaction with the economic state propelled Trump to victory in the Nov. 5 election. However, the economic outlook has become cloudy due to the new administration’s proposed fiscal, trade, and immigration policies.

“This report will assure the Fed that policy was not overly restrictive last quarter,” said Will Compernolle, macro strategist at FHN Financial. “New federal policies could set the economy on a new path soon.”

Gross domestic product (GDP) increased at a 2.3% annualized rate last quarter after accelerating at a 3.1% pace in the previous quarter, according to the Commerce Department’s Bureau of Economic Analysis.

Economists surveyed by Reuters had predicted a forecast of a 2.6% GDP growth rate. The economy grew 2.8% for the full year and 2.9% in 2023, expanding above the 1.8% pace that Fed policymakers view as non-inflationary growth.

Final sales to private domestic purchasers – a measure of domestic demand that excludes inventories, trade, and government – increased at a 3.2% rate, following a 3.4% rate in the third quarter. The personal consumption expenditures price index, excluding food and energy, rose at a 2.5% rate compared to a 2.2% pace in the third quarter.

The Fed recently maintained its overnight interest rate between 4.25% and 4.50%, having cut it by 100 basis points since September. The central bank has forecast only two rate cuts this year, reduced from the four it had projected in September, reflecting uncertainty regarding the impact of planned tax cuts, broad tariffs, and mass deportations of undocumented immigrants, all viewed as inflationary. Economists expect economic growth to weaken in the second half of the year, with inflation rising.

On Wall Street, stocks were little changed, the dollar slipped against a basket of currencies, and U.S. Treasury yields fell.

Consumer Spending Soars

Concerns over tariffs led consumers to rush to buy big-ticket items such as recreational goods and vehicles. Households replacing vehicles damaged by Hurricanes Helene and Milton also boosted spending, with consumer spending accounting for more than two-thirds of the economy growing at a 4.2% rate last quarter.

This marked the fastest growth rate since the first quarter of 2023, following a 3.7% rate in the previous quarter. Economists believe pre-emptive buying will persist into the first quarter. However, not all spending was driven by tariffs, as consumers also increased spending on services like healthcare.

“The data remind us it’s not just actual policy but also the prospects of such policies that can dictate economic behavior,” said Shannon Grein, an economist at Wells Fargo (NYSE:WFC).

With continued tariff threats, similar dynamics are expected in the first quarter, though any tariff-induced buying will likely be followed by a decrease in demand.

Spending is supported by a resilient labor market producing solid wage gains. Despite a slip in the savings rate to 4.1% from 4.3% in the third quarter, disposable income accelerated to a 2.8% growth rate from 1.1% in the third quarter due to higher wages.

A separate Labor Department report indicated that initial claims for state unemployment benefits dropped by 16,000 to a seasonally adjusted 207,000 for the week ended Jan. 25. While layoffs remain very low, companies are reducing hiring.

Imports declined despite robust consumer spending, lowering the trade deficit. Trade contributed neutrally to GDP after being a drag for three consecutive quarters.

Business inventories rose at a rate of $4.4 billion after a $57.9 billion increase in the third quarter, subtracting 0.93 percentage points from GDP. Trade and inventories are among the most volatile components of GDP.

Stephen Stanley, chief U.S. economist at Santander (BME:SAN) U.S. Capital Markets, anticipates a widening trade gap in the first quarter, as importers work to bring in goods before tariffs are implemented.

A significant strike by factory workers at Boeing from mid-September through early November contributed to reduced spending on equipment, which contracted at a 7.8% rate after experiencing double-digit growth in the previous quarter. Spending on structures declined for a second straight month, while investment in intellectual property products increased at a slower pace. Residential investment rebounded, and the outlook is cloudy as the Trump administration plans to cut spending.

“The outlook for 2025 hinges on achieving a delicate balance between competing economic forces,” stated Sung Won Sohn, Finance and Economics professor at Loyola Marymount University. “A measured approach that considers inflation risks while fostering growth will be essential for a strong and resilient economy.”,