CEPR logo

Fact-based, data-driven research and analysis to advance democratic debate on vital issues shaping people’s lives.

Center for Economic and Policy Research
1611 Connecticut Ave. NW
Suite 400
Washington, DC 20009

Tel: 202-293-5380
Fax: 202-588-1356
https://cepr.net

Close

On This Page

The economy grew at a 2.3 percent annual rate in the fourth quarter, somewhat less than had generally been expected. However the reason for the miss was a sharp slowing in inventory growth, which subtracted 0.93 percentage points from GDP for the quarter. The growth rate in final demand was 3.2 percent.

The growth for the full year was 2.5 percent. This brings the average growth rate for the four years of the Biden administration to 3.2 percent, the fastest growth for any president since the second term of the Clinton administration. Since the pandemic started, cumulative GDP growth has been 12.1 percent – more than twice the average for the other G-7 countries.

The biggest factor propelling growth in the quarter was a 12.1 percent jump in consumption of durable goods, which added 0.85 pp to the quarter’s growth. This was likely driven in part by people pulling forward purchases of cars and other big ticket items to avoid the risk of tariffs being imposed by President Trump.

Mixed Story for Productivity

The 2.3 percent growth figure may mean a somewhat slower number for productivity growth in the fourth quarter. Hours likely grew at slightly less than a 1.0 percent annual rate in the quarter, which means that productivity growth will be close to 1.3 percent. This is below the 2.0 percent growth rate we’ve seen since the pandemic.do you mean fourth quarter

This matters hugely for the future path of inflation and the sustainable pace of real wage growth. However, the quarterly data are erratic, and a slow pace of inventory accumulation in the fourth quarter could just mean that a more normal pace in future quarters gives a big boost to GDP growth.

Consumption Growth Overall Remains Solid

Consumption overall grew at a 4.2 percent annual rate in the fourth quarter, accounting for 2.82 percentage points of the quarter’s growth. Consumption of non-durable goods rose at a 3.8 percent rate, while consumption of services rose at a 3.1 percent rate. If the fourth quarter rise in durable consumption was partly attributable to people buying in fear of future tariffs, then we will see weaker growth or even falls in future quarters, especially if import taxes are put in place.

The 3.1 percent rate growth rate of services is slightly faster than the 2.9 percent rate we saw in 2023 and for the year as a whole. The biggest factor was a 27.7 percent jump in foreign travel in the fourth quarter. This is subtracted out as an import, so it does not add to GDP, but it is an indication that many people were feeling good about their economic situation at the end of last year.

Consumption of services, half of which is housing and health care, should continue at a healthy pace in 2025, unless the chaotic events around the recent government spending freeze continue. Since services account for more than two-thirds of consumption, this should mean consumption growth will remain strong for the immediate future.

Non-Residential Investment Falls at a 2.2 Percent Rate

Non-residential investment fell for the first time since the third quarter of 2021. The biggest factor was a 7.8 percent decline in equipment purchases. This is largely the reversal of a third quarter surge in spending on information equipment and airplanes, with fourth quarter spending essentially falling back to second quarter levels.

Investment in structures fell back at a 1.1 percent rate in the quarter following a 5.0 percent drop in the third quarter. Structure investment is edging downward after a huge surge in factory construction following the passage of the CHIPS Act and the Inflation Reduction Act. While factory construction remains at a high level it is no longer growing. With the changes in policy from the new administration, it is likely that factory construction and structure investment as a whole will fall off as projects are completed.

Investment in intellectual products was positive in the quarter, growing at a 2.6 percent rate and adding 0.15 percentage points to GDP growth.

Figure 1

Housing Investment Rises 5.3 Percent, After Falling in the Prior Two Quarters

Residential investment fell at double digit rates in the last three quarters of 2022 following the Fed’s sharp interest rate hikes. It has grown modestly the last two years although it did fall in the second and third quarters of last year. The fourth quarter rise added 0.21 percentage points to GDP growth in the quarter.

Housing is likely to contract somewhat in 2025, most immediately because interest rates have risen since the fall. However, the prospect of large-scale deportations, which are likely to remove many workers in the construction industry, will also be a negative factor for the sector. In addition, if the Trump administration follows through on its threat to impose import taxes, the price of many inputs, especially lumber, will create another drag on growth.

Trade Deficit Narrows Slightly in the Quarter

Both exports and imports fell 0.8 percent in the quarter; however, since imports are larger this added 0.04 pp to growth in the quarter. On the export side the biggest factor was a partial reversal of a third quarter jump in exports of capital equipment. The trade deficit now stands at 3.2 percent of GDP, slightly lower than the 3.4 percent share in the fourth quarter of 2020, the last quarter before Biden took office.

Inventory Growth Falls Sharply in Fourth Quarter

Inventories grew at just a $4.4 billion annual rate in the fourth quarter, down from a $57.9 billion pace in the third quarter. This weaker growth was a huge negative in the GDP number. It likely stemmed from businesses selling cars and other durable goods out of inventory to accommodate the surge in demand. When businesses rebuild their inventories it will be a burst to GDP.

Inflation Remains Close to 2.0 Percent

The PCE deflator grew at a 2.2 percent annual rate in the fourth quarter, while the core index rose at a 2.5 percent annual rate. This is little changed from the prior two quarters. While these figures are slightly above the Fed’s 2.0 percent target, the continued decline in rents will be a major factor lowering inflation in 2025, although it may be offset by other developments.

Biden Hands Off a Strong Economy

The changes in policy that the Trump administration is putting on the table pose threats to growth in many areas. Most immediately, the loss of a large number of workers due to large-scale deportations will crimp growth in housing and other areas. Higher tariffs will mean higher prices, which will also send interest rates higher. If there actually are large cutbacks in federal spending it will slow growth at least in the near-term. And the uncertainty around policy is likely to discourage investment in many areas until the future picture looks clearer. But at least at the end of 2024, the economy looked good.