Vehicles pass E-ZPass readers and license plate-scanning cameras on Fifth Avenue on the first day of New York City’s planned congestion pricing program to charge drivers for entering the central business district in Manhattan below 60th street in New York City, U.S., January 5, 2025. REUTERS/Adam Gray/File Photo
U.S. Economic Growth Slows in Fourth Quarter Amid Tariff Concerns and Boeing Strike
Washington, D.C. – The U.S. economy experienced a slowdown in the fourth quarter of 2024, with gross domestic product (GDP) increasing at an annualized rate of 2.3%, down from 3.1% in the previous quarter, according to the Commerce Department. The deceleration was attributed in part to a prolonged strike at Boeing, which dampened business investment in equipment. However, consumer spending surged at its fastest pace in nearly two years, reflecting strong domestic demand.
The slowdown occurred as businesses faced challenges in meeting increased consumer demand, with households accelerating purchases ahead of expected tariffs on imports under President Donald Trump’s administration. The depletion of business inventories and an unexpected decline in imports also contributed to the economic deceleration.
Despite higher interest rates set by the Federal Reserve in 2022 and 2023 to control inflation, the economy continued to expand above the Fed’s estimated 1.8% non-inflationary growth rate. However, uncertainty surrounding the new administration’s fiscal, trade, and immigration policies has introduced concerns about the economic outlook.
Federal Reserve Policy and Inflation Considerations
The Federal Reserve, which has gradually reduced its benchmark interest rate to the 4.25%-4.50% range, removed previous language in its policy statement suggesting that inflation was making clear progress toward the central bank’s 2% target. The Fed has signaled it will proceed cautiously with further rate cuts, projecting only two reductions for the year—down from four previously anticipated.
The decision to slow rate cuts is influenced by potential inflationary pressures arising from proposed tax cuts, broad tariff measures, and planned mass deportations of undocumented immigrants. Many economists expect economic growth to moderate further in the latter half of the year while inflation remains a concern.
Following the report, U.S. stock markets remained relatively unchanged, the dollar slipped against a basket of currencies, and Treasury yields declined.
Strong Consumer Spending Supports Growth
Consumer spending, which accounts for over two-thirds of U.S. economic activity, grew at a robust 4.2% annualized rate in the fourth quarter—the fastest pace since early 2023. The surge was driven by increased purchases of durable goods such as motor vehicles and recreational products, as consumers sought to buy ahead of expected tariff increases. Additionally, spending on services, including healthcare, contributed to the overall increase.
Economists believe this preemptive buying could persist in the first quarter of 2025 but caution that such demand surges may be followed by a period of slower consumer activity.
A strong labor market continues to support consumer spending. Real disposable income rose at a 2.8% rate, driven by steady wage growth, while the personal saving rate slightly declined to 4.1% from 4.3% in the previous quarter. Meanwhile, initial claims for unemployment benefits dropped by 16,000 to 207,000 in the final week of January, indicating continued resilience in the job market.
Trade and Business Investment Trends
Despite robust consumer spending, imports declined unexpectedly in the fourth quarter, narrowing the trade deficit. Trade had been a drag on GDP for three consecutive quarters but was neutral in the latest report. Some economists anticipate a widening trade gap in early 2025 as importers attempt to move goods into the country ahead of pending tariff hikes.
Business investment showed mixed results. Spending on equipment contracted sharply at a 7.8% rate, largely due to the impact of the Boeing strike. In contrast, residential investment rebounded, while intellectual property investment slowed. Spending on government projects also moderated, with uncertainty surrounding potential budget cuts under the Trump administration.
Economic Outlook for 2025
Economists anticipate that the trajectory of the economy in 2025 will depend on balancing inflation risks with efforts to sustain growth. While strong consumer spending and a resilient labor market provide stability, concerns over tariffs, fiscal policy shifts, and potential spending cuts introduce new uncertainties.
“The outlook for 2025 hinges on achieving a delicate balance between competing economic forces,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University. “A measured approach, one that considers inflation risks while fostering growth, will be essential in maintaining a strong and resilient economy.”
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