(Bloomberg) -- The US economy expanded at a solid pace at the end of 2024, fueled by a generous tailwind from consumer spending that more than offset drags from a strike at Boeing Co. and much leaner inventory investment.
Inflation-adjusted gross domestic product increased an annualized 2.3% in the fourth quarter after rising 3.1% in the prior three-month period, according to the government’s initial estimate published Thursday. The median forecast in a Bloomberg survey of economists called for a 2.6% growth.
Consumer spending, which comprises the largest share of economic activity, advanced at a 4.2% pace — the first time since late 2021 that outlays have exceeded 3% in consecutive quarters. The acceleration was the biggest since early 2023 and was led by a pickup in motor vehicle sales.
At the same time, a closely watched measure of underlying inflation rose 2.5%, marking only the second quarterly acceleration since late 2022, the Bureau of Economic Analysis data showed. December inflation and spending figures are due Friday.
The S&P 500 opened higher while Treasuries pared gains and the dollar remained lower.
The GDP figures cap another solid year for the world’s largest economy that defied expectations for a marked slowdown as consumers hung tough in the face of persistent inflation and high borrowing costs. The economy grew 2.8% in 2024 after expanding 2.9% and 2.5% in the prior two years, respectively.
That helps explain why the Federal Reserve is taking a more measured approach to future interest-rate cuts.
Chair Jerome Powell, speaking after the central bank held rates steady on Wednesday, said policymakers are waiting to see further progress on inflation and “do not need to be in a hurry to adjust our policy stance.”
He also said the economy is strong, which was further corroborated by the GDP report. A measure of underlying growth trends favored by economists that includes consumer spending and business investment, known as final sales to private domestic purchasers, advanced at a robust 3.2% pace.
“This report will assure the Fed policy was not overly restrictive last quarter and reinforces Chair Powell’s assertion yesterday that monetary policy is in a good place. Whatever the economic fundamentals were at the end of last year, however, new federal policies could set the economy on a new path soon,” Will Compernolle, macro strategist at FHN Financial, said in a note.
“All of this points to a patient Fed that can wait to see how the incoming data evolve,” he said.
Nonresidential fixed investment declined an annualized 2.2%, the first decline in more than three years. Business spending on equipment decreased an annualized 7.8%, reflecting the impact of a machinists’ strike at aircraft maker Boeing.
Investment in aircraft slumped at a 69% pace, and business spending on computer equipment dropped for the first time in more than a year. Outlays for structures declined for a second straight quarter.
Residential investment added to growth for the first time in three quarters, suggesting the housing market and construction are starting to stabilize. However, separate data Thursday showed pending sales of US homes declined last month for the first time since July, as high borrowing costs and prices especially hit the costliest parts of the country.
Government spending rose an annualized 2.5% following a strong third- quarter advance that was led by defense expenditures. Growth in federal spending is at risk as President Donald Trump’s agenda takes aim at programs he’s pledged to eliminate.
Other parts of the economy’s fourth-quarter report card didn’t score as well. Inventories were the largest drag, subtracting nearly a full percentage point from growth — the most since early 2023.
What Bloomberg Economics Says...
“The fourth-quarter GDP report is stronger than it looks at first glance — especially if inventories are excluded. That ultimately reflects a surge in demand from consumers that has fueled talk of US exceptionalism. It also gives the Fed leeway to be more patient on rates while it gauges the impact from Trump administration policies.”
— Eliza Winger. For the full note, click here
The outlook for the economy this year is one of more moderate growth. The latest Bloomberg month survey shows GDP growth will cool to 2.2% on average, with economists anticipating only a few Fed interest-rate cuts. At the same time, the roll-out of Trump policies add an element of uncertainty.
Trump is looking to deploy tariffs — perhaps as soon as this Saturday — in order to spur investment in manufacturing and encourage domestic production, which he says will help bring factory jobs home and reduce the trade deficit.
However, his first-term tariffs led to a drop in factory employment and industrial production contracted, amounting to a drag on growth that concerned Fed officials at the time, according to newly released transcripts of 2019 policy meetings.
The threat of tariffs has the rest of the world concerned as they come at a time when major economies are struggling. The US economy continues to outperform its global peers largely due to a strong labor market, marked by wages rising faster than prices and low unemployment. That’s helped to sustain consumer spending and broader economic activity.
Other figures Thursday showed applications for US unemployment benefits dropped by the most in six weeks, according to Labor Department data released Thursday. Continuing claims fell from a three-year high.
The US economy expanded 2.5% in the fourth quarter compared with the same three months of 2023. That compares with euro area growth of just 0.9%. In Germany, GDP shrank 0.2% after a 0.3% decline in 2023 — just the second time since 1950 that Europe’s largest economy has contracted two years in a row. The French economy grew just 0.7% from the fourth quarter of 2023.
Turning to Asia, recent data showed China’s two-track economy continued to be powered by trade while consumer spending remained muted — contributing to deflationary spiral that’s expected to persist this year.
Unadjusted for price changes, the Chinese economy slowed to 4.2% in 2024, the second-weakest pace since China began transitioning to a market economy in the late 1970s.
--With assistance from Chris Middleton, Maria Clara Cobo and Augusta Saraiva.
