Three major economic indicators—housing starts, core durable goods shipments and industrial production—beat forecasts in December, ending the year on a strong note.
We now see clear upside risks to our fourth-quarter gross domestic product forecast of 2.6% ahead of today’s releases.
While the breadth and magnitude of the gains across multiple sectors surprised us, we had flagged industrial activity and core business-equipment spending as two key drivers of growth in the final quarter of last year.
The impact of AI investment and the easing of tariff concerns showed up across much of the data.
Capital goods shipments increased …
Spending on electrical equipment, machinery, metals and electronics all surged on the month. Shipments of those goods also increased, adding to strength in the nonresidential component of GDP.
… while housing starts jumped …
The jump in housing starts was an even bigger surprise. While the level of new construction remains below what the economy ultimately needs, the month-to-month pickup in activity is encouraging.
… and manufacturing showed strength
More encouraging still was the rebound in manufacturing output in the industrial production report. The sector had been among the most exposed to tariffs last year. As trade uncertainty faded toward the end of the year, activity picked up largely as expected.
There could be more upside once we see the trade data on Thursday. Our forecast calls for a smaller trade deficit in December than the consensus expects.
The main wild card remains consumer spending. December’s retail sales report was disappointing. Still, with spending heavily concentrated in services, we expect overall consumption to hold up for most of the quarter.
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