Real GDP grew at a 2.3% annualized rate in the fourth quarter of 2024, according to advance data released today by the Commerce Department. The price index for GDP showed a 2.2% rate of inflation in 4Q. The price index for core personal consumption expenditures (PCE) showed a 2.5% inflation rate.
It’s important to note that “core” consumption excludes food and energy purchases. That core spending measure accounts for 61% of GDP. As “core” inflation was faster than overall inflation in 4Q, that should allay any suspicions that economists look at the core measure in order to get a lower inflation metric.
4Q24 growth was driven by consumer spending, which showed a 4.3% rate of advance. In fact, consumer spending contributed 2.8 percentage points to overall GDP growth, which tells you that the rest of the economy was a negative for growth overall (as 2.8% is greater than 2.3%).
Substantial negative contributions to growth came from business equipment investment and from inventories (equipment investment exerting a drag of -0.4% and inventories -0.9%). Government purchases rose, but at a much slower rate than was seen in 3Q. Construction activity rose slightly, compared to declines in the previous two quarters.
The 2.3% overall GDP growth in 4Q was a bit slower than the 2.5% average growth rate for 2024 as a whole and substantially slower than the 3.0% rates registered for 2Q and 3Q. This was the case despite the faster growth in consumer spending.
Inventory investment gyrates wildly, and the declines in equipment investment followed good gains in 2Q and 3Q, so it is hard to assert that the 4Q weakness in either is a sign of things to come. By the same token, the faster 4Q consumption growth may also be an outlier. Merchants seem not to have been prepared for robust holiday shopping, judging by the inventory drawdown.
So, it is anybody’s guess how things will shape up in 2025. Our take is that consumers may be overextended and that homebuilding is due for a pullback. On the other side, though, renewed animal spirits in the business sector could well drive stronger equipment investment. Meanwhile, the actual outcome and effects of tariff policy are unknown and any success in reining in government spending won’t take effect for quite a few quarters yet.
We believe the outlook for inflation is more discernible. As you can see in the chart, the growth rate for nominal GDP continues to trend slower. As long as nominal GDP/spending growth continues at recent rates or slower, there is less room for inflation and real growth to coexist. We take the slowing trend in nominal GDP growth as proof positive of the effects of Federal Reserve policy tightening and the wearing down of other Covid-episode stimuli.
Finally, the zig (lower) in nominal GDP growth and zag (higher, for now) in nominal consumption growth emphasize how disparately consumers and the rest of the economy behaved in 4Q.