Gross domestic product in the United States advanced by a solid 2.3% in the final quarter of the year, driven primarily by a 4.2% increase in household consumption and a 2.5% rise in overall government spending. The top-line figure was dragged down by a 0.93% decline in inventories.
For the year, GDP advanced at a 2.5% pace, which is well above the 1.8% long-run growth trend.
Given a strong labor market and the 2.8% increase in disposable income, household spending generated momentum heading into the new year despite the moderation in top-line growth.
The overall tone, tenor and composition of growth inside the fourth quarter report tends to support the Federal Reserve’s view, expressed on Wednesday, that it is in no hurry to resume its rate-cutting campaign.
The fourth-quarter GDP data reinforces our forecast that the Fed will not have any rate cuts this year, if it cuts at all, until late spring or the second half of the year.
Given the robust household spending, we think that demand is sufficient to mop up whatever inventories were built up in advance of expected tariffs.
From our perspective, apart from inventories and trade, GDP increased by 3.1%, which is a better barometer of the direction of the economy given the uncertainties surrounding trade policy.
Claims of a fading economy because of the inventory-distorted top line should be ignored. Investors should instead focus on strong underlying household demand.
Just as interesting is that growth based on the first estimate by the Bureau of Economic Analysis did not show a large drag because of trade despite the substantial increase in the trade deficit in December.
We expect that dynamic to show up in subsequent estimates of GDP, and for this reason the top-line figure may be revised down.
The data
Final sales to domestic purchasers excluding trade and inventories increased by 3.1%. Under current conditions, that figure is probably a better gauge to ascertain the true underlying pace of growth given the uncertainty around the direction of trade policy that may distort household and firm decisions at the micro level.
Real final sales increased by 3.2%, gross domestic purchases advanced by 2.2% while final sales to private domestic purchasers increased by 3.2% as disposable personal income jumped by 2.8%.
All the alternative growth metrics point to underlying domestic strength in the economy excluding trade and inventory accumulation.
These metrics should underscore central bank policy in the first half of the year and support greater business fixed investment, which should resume its upward trajectory this year to support that activity.
The major driver of growth in the final quarter was household consumption, which increased by 4.2%. Fixed investment declined by 5.6% and government spending increased by 2.5%.
Outlays on goods increased by 6.6%, demand for durables increased by 12.1% and services increased by 3.1%.
Fixed investment fell by 0.6% while spending on non-residential investment dropped by 2.2% and residential investment jumped by 5.3%.
Outlays on structures declined by 1.1% and equipment fell by 7.8%, while spending on intellectual property increased by 2.6%.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
Exports declined by 0.8%, which can be attributed to a stronger dollar and which resulted in a 5% decline in goods exports while exports of services increased by 7.2%.
Imports dropped by 0.8%—a number that we expect to get revised to show an increase in subsequent estimates by the Bureau of Economic Analysis—as demand for foreign goods declined by 4% and service purchases increased by 12.8%.
Federal consumption advanced by 3.2%, outlays on national defense increased by 3.3% while non-defense spending increased by 3.1%.
The takeaway
Top-line growth was distorted by inventory accumulation which fell by 0.93% as strong household consumption mopped up whatever increases were made to avoid coming tariffs.
Underlying growth excluding trade and inventory accumulation increased by 3.1% primarily because of a robust 4.2% increase in household spending.
We expect growth this year to expand at a 2.5% pace with risk of a quicker pace of expansion—above 3%—as the economy continues to outperform its global peers.
