U.S. economic growth slowed in the fourth quarter as a strike at Boeing (BA.N)
contributed to depressing business investment, but robust consumer spending probably keeps the Federal Reserve on a slow interest rate cut path this year.
The moderation in growth last quarter reported by the Commerce Department on Thursday was also because inventories at businesses were run down, underscoring the strong domestic demand. There was a surprise drop in imports, despite imports helping to boost the goods trade deficit to a record high in December, which had prompted economists to sharply downgrade their fourth-quarter growth estimates.
The economy last year defied dire predictions of a recession that had been fanned by the U.S. central bank hiking rates by 5.25 percentage points in 2022 and 2023 to quell inflation. Dissatisfaction with the economy swept President Donald Trump to victory in the Nov. 5 election.
"This report will assure the Fed policy was not overly restrictive last quarter," said Will Compernolle, macro strategist at FHN Financial. "Whatever the economic fundamentals were at the end of last year, however, new federal policies could set the economy on a new path soon."
Gross domestic product increased at a 2.3% annualized rate last quarter after accelerating at a 3.1% pace in the July-September quarter, the Commerce Department's Bureau of Economic Analysis said in its advance GDP estimate.
The economy last year defied dire predictions of a recession that had been fanned by the U.S. central bank hiking rates by 5.25 percentage points in 2022 and 2023 to quell inflation. Dissatisfaction with the economy swept President Donald Trump to victory in the Nov. 5 election.
"This report will assure the Fed policy was not overly restrictive last quarter," said Will Compernolle, macro strategist at FHN Financial. "Whatever the economic fundamentals were at the end of last year, however, new federal policies could set the economy on a new path soon."
Gross domestic product increased at a 2.3% annualized rate last quarter after accelerating at a 3.1% pace in the July-September quarter, the Commerce Department's Bureau of Economic Analysis said in its advance GDP estimate.
Growth for the full year came in at 2.8%. The economy grew 2.9% in 2023. It is expanding well above the 1.8% rate that Fed policymakers view as the non-inflationary growth pace.
The Fed on Wednesday left its benchmark overnight interest rate in the 4.25%-4.50% range, having reduced it by 100 basis points since September. It removed a reference to inflation having "made progress" toward the Fed's 2% inflation goal.
Fed Chair Jerome Powell told reporters that the economy "is strong overall." The central bank has forecast only two rate cuts this year, down from the four it had projected in September, when it embarked on its policy easing cycle.
That reflected uncertainty about the economic impact of fiscal, trade and immigration policies from the new Trump administration. Economists view the planned tax cuts, broad tariffs on imports and mass deportations of undocumented immigrants as inflationary. They expect economic growth to falter by the second half and inflation to rise.
U.S. stocks opened higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
CONSUMER SPENDING SOARS
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 4.2% rate last quarter. That was the fastest since the first quarter of 2023 and followed a 3.7% pace in the July-September quarter.
Spending is being underpinned by a resilient labor market, which is churning out solid wage gains. That was reinforced by a separate report from the Labor Department showing initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 207,000 for the week ended Jan. 25.
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.
Inventories increased at a $4.4 billion rate after rising at a $57.9 billion pace in the July-September quarter. They subtracted 0.93 percentage point from GDP. Trade and inventories are the most volatile components of GDP.
A crippling strike by factory workers at Boeing from mid-September through early November, which disrupted production and delivery of aircraft, contributed to depressed spending on equipment. Investment in equipment contracted at a 7.8% rate following double-digit growth in the third quarter.
Spending on structures declined for a second straight month. While investment in intellectual property products increased, the pace slowed from the third quarter.
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.