The American economy closed out 2024 on a strong note, driven largely by consumer spending even as it grapples with notable challenges such as declining business investment and persistent inflationary pressure. According to the Commerce Department, gross domestic product (GDP)—the broad measure of the economy's output of goods and services—expanded at an annual rate of 2.3% from October through December. This brought the full-year growth to 2.8%, slightly down from the 2.9% registered in 2023.
While the fourth-quarter growth fell short of economists' expectations of 2.4%, it is indicative of continued resilience within the economy. Notably, consumer spending surged at a remarkable pace of 4.2% during this time—the fastest growth since the first quarter of 2023—up from 3.7% between July and September of the same year. Yet, this optimism is tempered by the sharp decline of business investments, particularly as investments in equipment suffered following two strong preceding quarters.
Investors and consumers alike are feeling the pressure of inflation, which has made its presence felt as the Federal Reserve’s preferred inflation measure, the personal consumption expenditures index (PCE), rose to 2.3% annually at the end of the year. This is up from just 1.5% reported for the third quarter. Excluding the often volatile sectors of food and energy, core PCE inflation rose to 2.5% from 2.2%. This sustained inflation has resulted in cautious sentiment among policymakers.
President Donald Trump, who took office amid this economic backdrop, has inherited what many have characterized as a healthy and steady economy, with the unemployment rate being historically low at 4.1% by December. Despite pessimistic predictions earlier, such as the expectation of recession following multiple rate hikes by the Fed to combat inflation, the economy has managed to maintain growth rates above 2% consistently over the past ten quarters, showcasing remarkable resilience.
The Federal Reserve recently chose to keep interest rates unchanged, following three rate cuts since September. Fed Chair Jerome Powell stated during the announcement, "we do not need to be in a hurry" to make additional cuts, reinforcing the central bank's cautious approach as it navigates the complex inflationary environment.
Contrastingly, the European Central Bank cut its benchmark rate by 0.25% the same week. This highlighted the growing gap between the US's more vibrant economic growth and the stagnation seen across Europe, where the economy recorded zero growth at the year's end. The outlook for the US economy, though, is not without its gray clouds. Analysts have voiced concerns about the potential impacts of Trump's proposed economic policies, which promise both tax cuts and eased regulations on businesses. Nonetheless, these same policies include plans for substantial tariffs on imports and the deportation of undocumented workers, which could hinder growth and inflate prices over time.
Trump has expressed intentions to lower oil prices, reassuring supporters by declaring he would "demand" lower interest rates, but the Fed has deflected these comments, accruing pressure on the administration as it strives to shape economic policy. Those same economic dynamics could lead to potential trade wars, particularly if the proposed tariffs provoke retaliation from foreign trading partners.
Market responses indicate caution as uncertainties persist. Paul Ashworth, chief North America economist at Capital Economics, noted, "suggests the economy remains strong, particularly giving the fourth-quarter disruptions," referring to issues such as strikes at Boeing and adverse weather conditions impacting productivity.
Looking forward to 2025, general consensus among analysts indicates modest growth, projected to slow to 1.9% compared to the previous year's performance. Though unemployment rates are expected to remain steady, the potential for inflation increases complicates the Federal Reserve’s forthcoming decisions. The labor market is still described as solid, with consistent job growth maintaining consumer spending's robustness, which constitutes about two-thirds of the US economy.
Overall, as the economic environment exhibits both opportunities and risks, stakeholders remain on high alert for any shifts. While the groundwork appears favorable for continued growth, the complex interplay of administration changes, inflation pressures, and global market dynamics raises important questions about the pace and sustainability of recovery entering 2025.