Economic Growth in the Fourth Quarter of 2024 and Its Implications

A Solid End to 2024: Economic Growth and Consumer Strength

The U.S. economy closed out 2024 on a positive note, with a healthy annual growth rate of 2.3% in the fourth quarter. This figure, reported by the Commerce Department, matched the initial estimate and reflected strong consumer spending, which surged at a 4.2% annual pace from October through December. While this growth was slightly slower than the 3.1% pace seen in the third quarter, it highlighted the enduring resilience of the economy. For the entire year of 2024, the economy expanded by 2.8%, slightly below the 2.9% growth recorded in 2023. However, the solid performance underscored the strength of consumer demand, which has been a key driver of economic activity.

The Role of Consumers in Sustaining Growth

Consumer spending played a pivotal role in the fourth quarter, with Americans increasing their outlays on goods and services at a robust rate. This spending spree was a significant factor in keeping the economy on track, even as other components of GDP showed signs of weakness. Business investment, for instance, declined during the quarter, dragged down by a sharp 9% drop in equipment spending. Additionally, a reduction in business inventories shaved off 0.81 percentage points from the growth rate, indicating that companies were trimming their stockpiles rather than building them up. Despite these challenges, the underlying strength of the economy remained intact, with a key measure of core economic activity—excluding volatile components like exports, inventories, and government spending—growing at a healthy 3% annual rate.

Inflationary Pressures Persist

The economic data also revealed that inflationary pressures continue to be a concern. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) index, rose at a 2.4% annual rate in the fourth quarter, up from 1.5% in the previous quarter and exceeding the Fed’s 2% target. Core PCE inflation, which excludes volatile food and energy prices, was even higher at 2.7%, up from 2.2% in the third quarter. These figures suggest that price pressures remain persistent, complicating the Federal Reserve’s efforts to keep inflation in check.

A Strong Economy with Cloudy Prospects for 2025

President Donald Trump inherited a robust economy when he took office last month, with growth exceeding 2% in nine of the past ten quarters. The unemployment rate stands at a low 4%, and inflation, while elevated, has come down from its peaks in mid-2022. However, the outlook for 2025 is uncertain, as Trump’s policy agenda— including trade wars, federal workforce cutbacks, and mass deportations—poses significant risks to economic stability. These measures could lead to higher prices, labor shortages, and disruptions to global supply chains, all of which could undermine economic growth in the coming year.

The Federal Reserve’s Caution and Risks Ahead

The Federal Reserve, which cut interest rates three times in the final months of 2024, left its benchmark interest rate unchanged in January. With inflation showing signs of stubbornness, policymakers appear reluctant to ease monetary policy further. However, Trump’s proposed tariffs on imports from Canada and Mexico— which could reach 25%—pose a significant threat to the economy. Such measures could raise prices, exacerbate inflationary pressures, and lead to slower growth. These concerns are compounded by the potential for labor shortages resulting from mass deportations of undocumented immigrants, which could drive up wages and further fuel inflation.

Looking Ahead: Challenges and Uncertainties

The Labor Department’s latest report on unemployment claims added to the sense of unease, as filings unexpectedly rose to a three-month high. Some economists fear that layoffs linked to federal workforce reductions—ordered by Elon Musk’s Department of Government Efficiency—could push unemployment claims higher in the coming months. High Frequency Economics has already predicted that GDP growth could fall below 1% in the first quarter of 2025, with even slower growth possible if Trump follows through on his tariff threats. As the year unfolds, the interplay between consumer strength, inflation, and policy risks will shape the economic trajectory. The final estimate of fourth-quarter GDP growth, set to be released on March 27, will provide further clarity on the state of the economy as it navigates these challenging times.