US economy resilient despite moderation in growth

US economic growth slowed in the fourth quarter as a strike at Boeing depressed business investment in equipment, but consumer spending increased at its fastest pace in nearly two years, underscoring strong domestic demand that 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 businesses struggled to keep up with the surge in demand, partly driven by households preemptively buying goods ahead of tariffs on imports that have been promised by President Donald Trump.

Inventories at businesses were almost depleted. There was a surprise decline 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 recession fears that had been fanned by the US central bank hiking rates by 5.25 percentage points in 2022 and 2023 to quell inflation. Dissatisfaction with the economy swept Trump to victory in the Nov. 5 election. But the new administration’s proposed fiscal, trade and immigration policies have clouded the economy’s outlook.

“This report will assure the Fed that 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.

Economists polled by Reuters had forecast GDP rising at a 2.6% pace. Growth for the full year came in at 2.8%. The economy grew 2.9% in 2023. From the fourth quarter of 2023 to the final three months of 2024, it grew 2.5%.

It is expanding well above the 1.8% rate that Fed policymakers view as the non-inflationary growth pace.

A measure of domestic demand, final sales to private domestic purchasers - excluding inventories, trade and government - increased at a 3.2% rate after rising at a 3.4% pace in the third quarter. The personal consumption expenditures price index, excluding food and energy, rose at a 2.5% rate compared to a 2.2% pace in the third quarter.

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% goal.

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 impact of the planned tax cuts, broad tariffs and mass deportations of undocumented immigrants, which economists view as inflationary. They expect economic growth to falter by the second half and inflation to rise.

Stocks on Wall Street were little changed. The dollar slipped against a basket of currencies. US Treasury yields fell.

CONSUMER SPENDING SOARS Worries about tariffs had consumers rushing to buy big-ticket items like recreational goods and motor vehicles. Households replacing vehicles damaged during Hurricanes Helene and Milton also boosted spending.

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. Economists believed pre-emptive buying could persist through the first quarter. But not all the spending was tariff related, with consumers also increasing outlays on services like healthcare.

“The data remind us it’s not just actual policy, but the prospect of such policies that can dictate economic behaviour,” said Shannon Grein, an economist at Wells Fargo.

“We’d expect to see similar forces at play in the first quarter among continued tariff threats. But any tariff pull-forward will eventually be met with a lull in demand.” Spending is being underpinned by a resilient labour market, which is churning out solid wage gains. Savings remain lofty, though the saving rate slipped to 4.1% from 4.3% in the third quarter. Income at the disposal of households after accounting for inflation and taxes accelerated to a 2.8% growth rate from a 1.1% pace in the third quarter. It was driven by higher wage gains.

Agencies