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GDP grew 2.3% in the fourth quarter, below the second quarter’s 3.1% growth. Strong consumer spending (+4.2%) contributed nearly all of the growth, as businesses reduced their spending on equipment (-7.8%) and inventories (which subtracted nearly a full percentage point from quarterly GDP growth). Government spending rose a moderate 2.5%, and housing construction contributed to growth after declining in Q2 and Q3.
Consumers may not be able to sustain the pace, however. Growth in inflation-adjusted disposable income was only 2.8% in the fourth quarter, meaning that consumers had to reach into savings to fund their spending spree. The savings rate dropped below 4% in December, and averaged 4.1% for the quarter, its lowest level in two years.
2025 economic growth is likely to be slower, at 2.4%, down from 2.8% in 2024. But growth above 2.0% is good; it is better than the economy’s likely potential growth rate over the long run. Long-run growth potential is determined by the sum of productivity gains and labor force growth, and those two factors point to a roughly 2% long-term pattern for U.S. GDP.
Some influences that will affect GDP in 2025: Besides a slowdown in consumer spending growth, import growth will outstrip export growth, especially early in the year, as businesses try to bring in goods from abroad before any new tariffs are implemented. That would normally be a drag on GDP, but it may be balanced by additions to inventories, which count as a positive for GDP. Overall business spending will likely strengthen during the year as the manufacturing sector pulls out of its recession, unless exports drop if other countries retaliate against new U.S. tariffs on imports. Corporate profits are still high at 13.0% of GDP, so businesses still have the means to spend, once they feel more comfortable about the direction of the economy. State and local government agencies’ spending will start to slow as their post-pandemic hiring spree diminishes and their staffing approaches normal levels. What will happen to federal spending will be determined by whether the deficit rises or falls, and by what legislation can get through Congress.
Source: Department of Commerce: GDP Data
