The U.S. economy’s performance in the fourth quarter of 2024 has sparked discussions among economists and market analysts, particularly in light of the recent decision by the Federal Reserve to maintain interest rates. The latest data from the Commerce Department’s Bureau of Economic Analysis reveals that the economy grew at an annual rate of 2.3% during this period, falling short of the anticipated 2.6% growth forecasted by economists surveyed by LSEG. This growth rate also represents a decline from the 3.1% GDP growth recorded in the third quarter, raising questions about the underlying factors contributing to this slowdown.
### Consumer and Government Spending Drive Growth
Despite the overall slowdown, the fourth quarter’s GDP growth was primarily fueled by an increase in consumer and government spending. Consumer spending surged by 4.2%, a notable rise from the 3.7% growth observed in the third quarter and significantly higher than the 2.8% increase in the second quarter. This robust consumer activity indicates a resilient demand for goods and services, which has been a critical driver of economic growth.
Government spending also contributed positively, increasing by 2.5% in the fourth quarter, although this was a deceleration from the 5.1% growth seen in the previous quarter. The combination of these two factors highlights the importance of consumer confidence and government expenditure in sustaining economic momentum, even amid challenges.
### Decline in Business Investment
In contrast to the positive trends in consumer and government spending, business investment experienced a notable decline of 5.6% in the fourth quarter. This downturn is particularly concerning as it reflects a cautious approach by businesses in an uncertain economic environment. Investment in equipment fell by 7.8%, while investment in structures decreased by 2.2%. However, this decline was somewhat mitigated by a 5.3% increase in residential investment and a 2.6% rise in intellectual property products, suggesting that while some sectors are contracting, others are still showing signs of growth.
### Disposable Income and Savings Trends
The report also highlighted changes in disposable personal income, which increased by 2.8% in the fourth quarter. This acceleration from previous quarters indicates that consumers may have more financial flexibility, potentially supporting continued spending. However, personal savings saw a decline, dropping to $896 billion from $936 billion in the prior quarter, with personal saving as a percentage of disposable income standing at 4.1%. This decrease in savings could raise concerns about the sustainability of consumer spending in the future, especially if economic conditions shift.
### Federal Reserve’s Interest Rate Decision
Amid these mixed economic signals, the Federal Reserve opted to hold interest rates steady during its recent meeting. This decision follows three consecutive rate cuts in the preceding months, reflecting the central bank’s cautious stance in the face of persistent inflation concerns. The Fed’s current target range for interest rates remains between 4.25% and 4.5%, and market expectations suggest a growing likelihood that rates will remain unchanged in the near term.
The CME FedWatch tool indicates that the probability of maintaining the current rate range has increased from 77.2% to 82%, underscoring the market’s anticipation of a continued pause in rate adjustments. This cautious approach by the Fed is indicative of the balancing act it must perform—supporting economic growth while keeping inflation in check.
### Economic Outlook for 2024
Looking ahead, the BEA’s report also provided an estimate for real GDP growth in 2024, projecting an increase of 2.8%. This figure is slightly lower than the 2.9% growth recorded in 2023, suggesting that while the economy may continue to expand, the pace of growth could moderate. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, noted that the fourth-quarter GDP capped off a surprisingly strong year, driven by a robust consumer supported by wealth creation and a strong labor market.
However, the persistent inflationary pressures pose challenges for the Fed, as the bar for future rate cuts appears to be rising. As the central bank prepares for its next meeting in March, the economic landscape remains dynamic, with various factors influencing both consumer behavior and business investment.
In summary, the fourth quarter of 2024 has revealed a complex economic picture characterized by strong consumer spending and government support, juxtaposed with a decline in business investment. The Federal Reserve’s decision to hold interest rates steady reflects a cautious approach to navigating these economic conditions, as the outlook for 2024 suggests continued growth, albeit at a potentially slower pace.
